Inflation was a stone’s throw from 8% even before the war broke out, involving two countries that account for a large proportion of energy and agricultural commodities around the world.
I wouldn’t be surprised to see that number rise as high as 10% in the coming months.
Working in an industry that’s obsessed with the markets, I think the questions people are asking about inflation now come from their portfolio perspective.
Should I buy the commodity?
How about Tips?
Is It Too Late to Buy Energy Stocks?
Have you seen the returns on Series I Savings Bonds?!
How do I hedge against inflation???
The way I see it preparing for inflation is ahead of time, not when it is happening.
From 2009-2020, the US stock market was above the rate of inflation and above 13% per year. If you’ve been an investor for a long time, you were hedging against high inflation before you came here.
Regardless of how you manage your investments to account for higher prices, there are other ways to hedge inflation beyond your portfolio.
Here are some ideas for the best personal finance inflation hedge:
Costco membership. Are the prices going up at Costco just like other grocery stores? Safe. But if the prices increase further then buying in bulk is a good way to go.1
Your Costco membership also comes with slightly lower gas prices, which is at least what you pay for your annual membership and then some.
Plus, you can still get a Costco hot dog and soda for $1.50, the same price it was in 1985 (I’m only half kidding here).
A 30 year fixed rate mortgage. The whole reason to invest in the first place is to improve your standard of living. If you buried all your money in your backyard, it will eventually lose its value over time:
You can think of debt in the opposite way. With debt your liabilities lose value over time and that’s a good thing. This is what makes a mortgage with a low interest rate one of the best inflation hedges on the planet.
The average sale price for an existing home in the United States is now approximately $350k. Assuming a down payment of 10%, using an average 30-year mortgage rate of 3.7% over the past 5 years would give you a monthly payment of about $1,450.
Inflation is running at 8% over the past year, meaning someone paying $1,450/month from the previous year would now technically equal $1,335. I didn’t net the after-tax cost of loans on mortgages here, but you get the idea.
The combination of rising home prices and low mortgage rates has made housing the best inflation hedge for the vast majority of Americans over the years.
Holding on to fixed-rate debt also means you are not subject to inflationary pressures on rent.
Unfortunately, if you don’t have your own home, you’re going to chin it up. According to Apartment Listing, the year-over-year increase in rent was about 18% at last reading.
substitute capacity. Last week I found myself in one of the happiest places on earth on a Friday afternoon – the liquor store.2 I like to check his channel on trips like this so I asked the owner how inflation was affecting his business.
He told me he was seeing higher prices across the board, but what surprised him most was a new gas surcharge on his ice delivery. He said he charged her $60 for a $30 delivery of ice.
I think we’ll see a lot more of this in the coming weeks and months. Uber just announced that they’re adding a charge of $0.45 to $0.55 per trip, while Uber Eats deliveries will include a $0.35 to $0.45 surcharge.
I know we have all become accustomed to paying for convenience, but with the high prices some people have to make different choices with how they allocate their budgets.
Maybe the $20 upcharge for DoorDash isn’t worth it anymore. Maybe you go to get a pizza instead of paying for delivery. Maybe give up 1-2 nights of going out to eat to compensate for higher utility bills.
For those with a tight budget, there are probably going to be some trade-offs.
Avoiding lifestyle creep. Families living at lower levels of income are most affected by inflation as they do not have enough space in their budgets when prices rise to meet their needs.
But the group that is easiest to take advantage of with higher prices are those with higher incomes.
Last month I wrote about Chanel raising the price of her handbag from $5,200 in 2019 to $8,200 today. These bags are indicating that rich people are willing to pay.
Avoiding the siren song of luxury goods is an easy way to keep your personal inflation rate out of control.
Ability to negotiate higher wages. This option doesn’t get discussed enough in personal finance circles, but it’s by far the best environment for employees to ask for a pay increase.
There are abundant employment opportunities, labor shortages and we are still in a world where the pandemic has reduced demand. If you provide real value to your employer, now is the time to ask for more money.
And if they don’t value your work, there are plenty of alternatives these days elsewhere. A recent study by Pew Research surveyed people who quit their jobs in 2021. Most were looking for higher pay or flexibility (the ability to work from home is another good hedge against high energy prices):
At least half of these workers say they are earning more money (56%) now than at their previous job, have more opportunities for advancement (53%), have more work and family responsibilities (53%) %) have an easier time balancing. More flexibility to choose when they put in their working hours (50%).
Saving money is always helpful but when prices are rising it becomes very difficult for many families to keep money aside.
Making more money is one of those things that no one teaches you how to do, but it’s probably your best bet for improving your quality of life in the long term.
I know putting an inflation hedge on your portfolio is the sexiest option, but you have more control over your personal finances than the markets when it comes to fighting inflation.
Further reading:
Why housing is a good hedge against inflation
1This is when the extra freezer in the garage comes in handy.
2So much excitement in the air about the plans for the weekend.
