“The Feds Big Worry is Inflation, Not Markets” writes Justin Lahart in a recent WSJ.com article.
After writing about inflation for 8 years, my predictions of rising inflation are coming true. Now is the time to learn how to handle inflation.
Prices are inching up from recent years, although, nothing like the double digit inflation rates of the 1980’s. In 1980-1982 inflation rates were 13.5, 10.3 and 6.20% respectively. In contrast, the CPI rose 0.5% in January, 2018 and 2.1% over the last 12 months states the BLS.com.
Now 2.1% inflation is still quite low, but fears abound that low unemployment rates will drive up wages and along with it, with inflation. And then the Fed will be forced to raise interest rates even faster.
The Fed is on tap to raise interest rates several times this year. And this matters because when the economy heats up, with lower unemployment rates and more money in your pocket from the recent tax cuts, there will be more money chasing a stable amount of goods.
This puts upward pressure on prices and feeds inflation.
The Fed raises interest rates in an attempt to temper inflation.
Now inflation isn’t all bad. Higher interest rates lead to higher CD and bond rates – great for savers.
But inflation can shrink your recent pay raise.
Although the inflation figures remain modest now, at about 2.0%, greater inflation will impact your spending.
Now, you each have your own personal inflation rate, depending upon your purchases. If car prices advance, and you don’t buy a car, it doesn’t matter. But when food prices advance, everyone feels the pinch. As fruit prices inch up, that inflation hurts, if you are a big fruit consumer.
If you’re not feeling inflation now, you will be soon. So, here’s my personal inflation confession with tips about how to handle inflation and save money.
Tips & Strategies to Handle Inflation
Fortunately, since inflation is a common occurrence, there are reliable coping strategies. Following are some of my inflation busting strategies, for consumers and investors, as well as tips from across the web.
Inflation Shopping Tips
- The main premise of shopping in an inflationary environment is to buy in bulk when costs are reasonable.
- Stock up on sale commodity items. With cotton prices sure to rise, clean out the Hanes aisle during their underwear sales.
- Paper towels, napkins, toilet products and other non-perishables are other products to stock up on when on sale.
- Don’t forget the towels and sheets during the annual January white sale.
- End of season shopping is a mecca of bargains.
- In the grocery, check out the tables of “sale and near expiration date” items.
- Plan your meals and make a list. No impulse shopping.
- Consider joining a shopping club to save on those items you use most frequently. Make sure not to get distracted by impulse purchases of a 64 pack of skittles candy or other non essentials.
- Even if you are not a couponer, an app that make couponing easy.
- Barter for goods and services to combat rising prices.
- Collaborative consumption is another take on the bartering concept. Great way to get what you need and share what you have.
- Substitute low cost foods for higher priced ones and use the internet to come up with recipes to fit the ingredients you have on hand. Plug a list of ingredients into the search, and see what comes up.
- Consignment, second hand shops, and garage sales, especially in fancy neighborhoods, are great for bargains.
Inflation Investing Tips
- Buy short or intermediate term bond funds, in lieu of long term funds. With rising interest rates, the principal value of the fund will decline as interest rates rise. On the positive side, expiring bonds are replaced with higher yielding ones.
- Maintain a diversified portfolio, as the future is uncertain. It won’t protect you from market declines, but with diversification, when one investment class falls, another may increase.
- When inflation increases, stock prices usually follow suit. Don’t be afraid to increase those contributions to your stock index mutual funds when you believe inflation is in the wind.
- Consider these investments backed by the US Government. These two investment vehicles are specifically designed to protect your capital when from the ravages of inflation; Treasury Inflation Protected Securities (TIPS) and Series I Government Bonds.
- Consider step up notes. These bonds increase their dividend payments at pre-determined intervals.
- During periods of rising interest rates ladder your CDs. Buy CDs, with varying maturities. When one CD comes due, invest the proceeds in a higher yielding CD.
Now you’re armed with actionable strategies about how to handle inflation. Don’t panic, take charge, and start implementing your inflation-beating strategy. You’ll be ahead of the financial curve.
What are your strategies for coping with inflation?
Updated February 17, 2018.