How to Turn Inflation (Including model Portfolio) to Your Advantage: Simple Strategies for Financial Resilience

In today's unstable global economy, it's not just good for school to understand inflation; it's necessary to protect your financial future.

As prices go up and down and the value of money changes, understanding how things work can make the difference between doing well and failing.

This article takes the mystery out of inflation and gives you useful information and tips on how to not only survive but also grow during times of economic change.

The information in this article is a crucial guide whether you're protecting your savings or planning your next business move. As you jump in, make sure you have the tools you need to confidently and clearly navigate these rough economic seas.

Inflation as a Problem for Society:

Inflation in the U.S. is more than just a number; it has a strong effect on people's sense of what is fair and just, similar to what E.P. Thompson called the "moral economy." People think that prices going up are not only annoying but also against social rules, since businesses should act in the best interests of the community.

Many people were angry at banks during the 2008 financial collapse. Similar to today's inflation, people not only perceived the crisis as an economic failure, but also as a moral one, as they believed that the financial institutions prioritized their own profits over the welfare of society.

How People See Real Income:

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Most people think that inflation makes real income go down. Since the start of the COVID-19 pandemic, price increases have been greater than pay increases, confirming this idea. Even though wages have only recently started to make up, the initial gap has made things less affordable for a long time.

Think about how hard it must be for retirees who depend on fixed pensions during the recent price increases. The rising costs of things like food and medical care have made it harder for many people to keep up with their bills, which has a direct effect on their real wages.

Effects on Living Costs:

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Americans are most worried about how much they can buy basic goods like food and gasoline, whose prices have gone up more quickly than those of other goods. This will disproportionately affect family groups with fixed incomes or lower incomes.

In places like San Francisco, where the cost of living has always been high, recent inflation has made things worse, especially in the food and housing markets. Because of this, some people have had to move to cheaper places or drastically cut back on spending on things they don't need.

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Inflation and Economic Confidence:

People don't think that rising inflation means the economy is weak, even though some economic theories, like the Phillips curve, say that there is a trade-off between inflation and unemployment. The fact that controlling inflation is far more important than other economic goals like lowering unemployment or boosting growth demonstrates this feeling. In Argentina, where inflation has been very high for years, people don't trust the economy, so they hold on to U.S. dollars as a safer way to save money. This shows that people don't trust the local currency or the people who run the economy.

Central Bank Credibility and Market Reactions

The credibility of the Central Bank and the market's reaction are important considerations. Inflation that lasts for a long time can hurt the credibility of monetary officials (like the Federal Reserve) and make financial markets less stable. For the economy to stay stable, people must trust these organisations. For example, Zimbabwe's central bank lost a lot of trust during the worst of the hyperinflation in 2008 and 2009. Foreign coins such as the U.S. dollar and the South African rand replaced the Zimbabwean dollar for everyday use.

Differences Between Economic Theory and How People Feel:

Some experts believe that inflation is a normal part of an expanding economy and that the job market is strong, but most people don't agree. They attribute the cause of inflation to corporations' greed and an imbalance of power in wage negotiations, rather than market forces or economic strategy.

Even though the job market in the U.S. has been very strong lately, many workers have felt that their pay raises have not kept up with inflation. This is especially true in industries like retail and hospitality, where workers' real buying power has gone down even though their wages have gone up. Political Effects:

People's dissatisfaction with inflation has direct political consequences for how much they support the current and future policies of the government. This is especially important right now because economic problems often decide who wins elections.

In France, the "Yellow Vest" movement began in 2018 because people thought that higher fuel taxes were making living costs even higher. As soon as this movement started, it grew into a larger protest against economic policies seen as bad for the middle and working classes. This had a big effect on politics.

?Portfolio Management

Assuming the insights from the economic analysis of the current inflation situation in the U.S., here is how I would strategically allocate a $100,000 investment to create a diversified portfolio. The rationale for each investment is tied to the economic observations in the article, focusing on the themes of inflation impacts, economic stability, and sectors likely to perform well in this environment.

Explanation of the Rationale:

TIPS: Given the current inflation trends, an allocation towards TIPS is prudent as they offer protection against inflation, ensuring that the investment maintains its real value.

Gold: Historically, gold has served as an effective hedge against both inflation and currency risks. In times of uncertainty, its value often appreciates.

Consumer Staples and Healthcare ETFs: These sectors typically perform well during economic slowdowns or inflationary periods because they deal in necessities.

Technology Sector ETFs: Despite potential short-term volatility, the technology sector is crucial for long-term growth, especially with ongoing digital transformations across industries.

REITs: Real estate often correlates with inflation trends as property values and rents rise, which can provide a good return on investment during inflationary times.

Cash: Keeping a portion of the portfolio in cash or near-cash investments provides flexibility to quickly respond to market changes and leverage opportunities as they arise.

This diversified approach aims to strike a balance between growth potential, inflation protection, and stability, considering the current economic context as discussed in the previous analysis.

Questions to ponder

• How secure is your financial future if inflation continues to erode your purchasing power?
• Could your current investment strategy actually be setting you up for financial failure in times of economic turmoil?
• Are you unknowingly allowing societal norms and perceptions about inflation to dictate your financial decisions?
• What if the real threat to your wealth isn't the market, but your understanding of inflation's impact on your income and savings?
• Is it possible that everything you believe about economic stability and prosperity is based on outdated assumptions that no longer hold true?