Why you should be worried about inflation… (and what you can do about it)
Inflation isn’t coming, it’s already here.
Here is why — In the past year the Federal Reserve has printed more money than ever before. [i] We need to understand that, using inflation adjusted dollars, the USA spent 4.1 trillion to defeat both the Nazis and the Japanese Empire during World War II. Pandemic spending is just about 6 trillion dollars.
Let’s put that in perspective, we spent less money creating an Army and Navy, basically from scratch, to fight a world war over four years, on two fronts, then we did in just over a single year on the pandemic.
Much of that pandemic spending has gone to our savings accounts. [ii] In April, personal income jumped over 21% and the savings rate jumped from about 14% to 27.6 %, when compared to February. A lot of that money has also gone into investments including real estate, stocks, precious metals, and even cryptocurrency.
We are facing two problems. The first is that there is too much money chasing too few products and services. Some commodities have risen in price and then fallen when supply has met demand, but other goods cannot so easily be produced. The second is that the more money the Fed prints, the less value it has. This is especially problematic when we consider international trade. When the dollar loses value, the price of goods that are produced outside of the nation go up, sometimes rapidly. Additionally, even if goods (or services) are made here, when the price of the raw materials go up, the price of the product goes up. Consumers in our shrinking middle class begin to lose purchasing power even as they see the ‘value’ of their homes and investments rise.
Inflation has shown itself in the stock market with a P/E ratio which is 90% above average. [iii] The same ratio was not much higher right before the tech market bubble in 2000. We see inflation in the housing market where we have a price to income ratio of 6.53, which is just below the level of 7.01 before the last housing market crash in 2006.[iv]
Everyday items are becoming more and more expensive as well. A trip to the grocery store has gone up by 2–3%, [v] and energy prices as well as other basic household expenses have been increasing.
The good news is that in the USA we are very fortunate because our inflation is held in check due to the Dollar being the world’s reserve currency, at least for now. Basically, this means most goods around the world are priced (and paid for) in U.S Dollars which gives us stability. But we’ve had periods of inflation before, such as in 1980 when it was close to 14%. Fortunately, we aren’t there yet. Many believe that the failures of the late 70’s and early 80’s were caused by an easing of monetary policy. Now we are repeating the same policy; spending too much, too quickly.
So, how can the average person prepare for inflation?
Get out of debt — Most people have debt tied to the level of inflation. That consumer debt in loans or credit cards often has adjustable interest. In other words, if the interest rates go up, so do your payments. Interest rates often rise when inflation occurs. If you must remain in debt, at the very least make sure you have a fixed rate loan. Don’t buy anything (other than a home) if you have to finance it. And please don’t get an adjustable-rate mortgage.
Know your spending — Make that budget and keep track of what you spend. Do you really need to spend money on both cable and subscription streaming services? (Hint — no you don’t.)
Start your savings — Get prepared for the unexpected. Have some money set aside for common place ‘emergencies.’ Yes, the value of those dollars will decline, but the ability to use them when needed means you don’t need consumer debt.
Buy things strategically — Buy things which you will eventually use when they are on sale and store them for later use. This can include food items but also applies to many other purchases. For example, holiday cards are typically ½ off after the holidays. Not only will you get your cards cheaper, you also won’t have to rush out at the last minute.
Lock in your costs — Try to get contracts that have the same pricing for as long as possible, and make sure they are fixed rate contracts not tied to inflation.
Invest wisely — Invest in assets that are more likely to respond positively when inflation happens. This can range from Treasury Inflation-Protected Securities to precious metals and other inflation friendly investments.
Invest in yourself — Become a more valued entrepreneur or employee by consistently learning new skills in an ever-increasing competitive workplace.
Inflation will not be the end of the world. Humans have endured far more calamities and other nations have fared far worse than we will. You can adjust your lifestyle and make the needed changes that our economy is undergoing.
Note: I’m not a financial advisor and this article is for entertainment only. As always consult your financial advisor before making any investment decisions. Due your Due Dillegence.
Photo by Karolina Grabowska from Pexels
[ii] https://www.reuters.com/business/us-consumer-spending-income-rebound-march-2021-04-30/
[iii] https://www.currentmarketvaluation.com/models/price-earnings.php
[iv] https://www.longtermtrends.net/home-price-median-annual-income-ratio/
[v] https://www.ers.usda.gov/data-products/food-price-outlook/summary-findings/
