Navigating high inflation
As you’ve surely heard, inflation has been running very high in 2022. It started increasing last year and now stands at 8.6%. Hopefully this is the peak and it doesn’t get worse from here. I won’t get into detail on the reasons for inflation which include mistakes by the government and Federal Reserve, supply chain problems, and to a lesser extent the war in Ukraine. Rather, I’ll focus here on what you can do about it.
When inflation is high, your money loses purchasing power. With an inflation rate of 8.6%, $100 will only buy $91.40 worth of goods a year from now. That’s a significant reduction and can erode your purchasing power quickly over time. Ideally you’d invest your money at a rate of at least 8.6% to maintain or increase purchasing power, but that’s not always easy. Here are a few things you can do to combat the problem:
1) Leave stocks and bonds where they are
While many have seen their retirement portfolios take a dive this year, selling now would not be a good idea. It’s rarely a good idea to sell investments at lower prices and take a loss. You never know when the market will start marching higher, and you’ll miss the benefits. Also, many stocks pay dividends and bonds pay interest. While not enough to offset inflation, they’re at least one place you can find a decent yield in this environment.
2) Consider buying series I bonds
If you haven’t heard of series I bonds this is the time to do some research. These government bonds pay interest based on the inflation rate and today are yielding 9.62%. They are backed by the federal government so they’re highly unlikely to default. There’s no other place you can find an almost guaranteed yield so high.
There are some drawbacks though, including a $10,000 per year investment limit, and you can’t take out your money for a year. Do some research to fully understand I bonds, but they could be a good place for extra cash.
3) Purchase with discretion
Always ensure you’re prioritizing your needs such as food first before spending on extras. As your needs become more expensive you may need to cut back elsewhere.
Delay purchases that are supply chain casualties. Supply chain problems have caused abnormal price movements for certain goods. The perfect example is used cars which in many cases are selling for more than their new counterparts. If you can delay these purchases until things return to normal, do so.
There is no magic bullet to blunt the effects of high inflation on your life, but taking the steps above should help you navigate these times until a return to normal returns. Hopefully sooner rather than later.
