Recent high inflation rates are driving up the price for almost everything and eroding the value of your money. With varying opinions on the potential duration of the current inflation surge, it’s important to understand the causes and how you can protect your money.
Possible causes of this inflation
While the root causes of inflation are not always easy to identify, the premise is simple – prices are going up for goods and services. This is often because demand is higher than supply. Here are some of the basic drivers of today’s inflation.
- The demand-pull situation. This occurs when demand for a product increases, but the supply remains the same. Think of a vendor selling ponchos at a state fair. If it rains, the demand for ponchos will spike and fair goers will be willing to pay more to keep dry. We’ve seen a similar situation develop with the pandemic, as things like toilet paper and hand sanitizer have been in extremely high demand. And more recently, we have seen some of that pent-up demand releasing as pandemic restrictions are eased, like all of the advance bookings at popular vacation destinations.
- The cost-push situation. This happens when demand stays constant, but supply is reduced. An example of this is when a lower-yield crop season experiences a major hardship like a drought. Consumers still want their dinner salads, but the lettuce is sparse. So retailers charge more to cover their increased costs. Or when paper mills shifted production to handle the higher toilet paper demand, it took pulp away from paper and packaging. These supply reductions created a shortage which forced them to increase their prices.
- The money supply. The more money there is available to spend (high money supply), the more the demand for all goods and services goes up. There are many reasons for an increased money supply from the government spending programs to wage increases. As employers are having a hard time filling positions, they must increase salaries to attract employees.
Recommendations to protect yourself during high inflation
- Create alternative savings that is NOT cash. The value of your money sitting in your wallet or in low-interest bank accounts is shrinking before your eyes. The past year has seen the highest inflation rates in the last decade at 5.4%, according to the Consumer Price Index (CPI). That means if your savings account is earning 0.6%, you’ve lost 4.8% in purchasing power over the last 12 months. Get your money to work for you by considering:
- Low risk, dividend-paying stocks
- CDs, bonds, and other investments with various maturities to prepare for higher rates
- Direct lending vehicles through vetted, respected facilitators
- Investing directly in property, small businesses, or other tangible assets
- Invest in yourself to learn a new trade or skill
- Lock in fixed rates on debt. Inflation can be your friend if you have a low-interest, fixed-rate loan. For example, inflation will tend to increase the value of your house over time, yet your monthly payment will remain the same. So borrowing money at a low fixed interest rate, while the underlying property value increases with inflation, can be a strategy to consider.
- Delay large expenditures. Do your part to reduce demand by postponing large purchases. Consider delaying the purchase of a new car, adding to your home, or taking an overseas trip until demand flattens and prices come back to a normal rate.
It’s impossible to avoid the effects of high inflation altogether, but with some smart investing and the willpower to temporarily curb spending, you can reduce inflation’s impact on your personal bottom line.