There is a saying that the only two things inevitable in the world are death and taxes. A close runner up taking the bronze medal would have to be inflation.
Inflation is defined as a general increase in prices and fall in the purchasing value of money. The Bureau of Labor Statistics tries to measure inflation with the use of the consumer price index (CPI), which is a weighted average for a basket of goods and services the average American urban consumer consumes.
Many Americans can still remember the high rates of inflation of the 1970s into the early 1980s where the cost of nearly everything from groceries to gas to automobiles went up year after year at rates in excess of ten percent a year, putting a strain on the family budget. With the current federal budget deficits and national debt level reaching new heights, there are those who predict an increase in the inflation rate. There are some steps to help protect you and your family from inflation.
A dollar today is worth more than a dollar tomorrow so preserving the purchasing power of today’s dollar is important. There are investments that are considered traditional stores of value, which would include items such as gold, real estate, and stocks. Gold in recent months traded as high as $1,800 an ounce, which means a relatively small amount of gold can store a relatively large amount of value that can fit into home safes.
Real estate, such as a home, is a good investment as it serves two purposes: A hedge against inflation and providing shelter to live in and call home. While the price of homes is closely correlated to interest rates, which usually move in the same direction as inflation, the benefit comes from the reduced risk exposure to rent rates. Rents will go up in an environment of high inflation, but the fixed rate mortgage on a home stays the same regardless of inflation. The average American household spends roughly 30 percent of its income on the mortgage. Buying a home will lock in 30 percent of their expenses from the effects of inflation.
Stocks are another good investment to protect against inflation. While businesses also will see an increase in the cost of their goods, business that are able to pass that cost onto consumers who will be in the best shape to preserve the purchasing power of the investment. These businesses are those whose core concentration are in commodities such as oil, grains or metals, which allow them to have pricing power even in an inflationary period.
Decreasing one’s spending is another way to help weather the effects of inflation. Spending can’t be measured simply in terms of dollars, as inflation will have its hand in this. Rather it should be measured in the amount of goods or services you purchase. The number of gallons of gasoline filled into the car tank, kilowatts of power the home uses, number of nights spent in a hotel, or the meals eaten out are a measurement of one’s spending habits. Looking for ways to decrease these spending numbers can help when inflation drives up the prices.
Buying a more fuel efficient or reliable car, replacing the 15 year-old electric hot water heater, taking more local trips to parks for recreation, and learning how to enjoy cooking at home will reduce the goods and services consumed.
Ben Franklin once said, “An ounce of prevention is worth a pound of cure.” Conducting routine maintenance on the car, home and even one’s body can keep them operating in tip-top performance and efficiency. Cars can gain increased miles per gallon simply by keeping the tires properly inflated and the oil changed. A home’s heating and air ventilation systems work more efficiently by changing the air filters and having them checked out once a year by a technician. Exercising and getting a yearly physical can reduce health care expenses and by diagnosing a problem earlier when it is less costly to correct.
Inflation is a necessary evil in a modern capitalistic economy for economic growth. While it is the Federal Reserve’s mission to keep inflation at a low stable rate, you should still be proactive to take steps to protect yourself from the negative side effects of inflation. Before liquidating the retirement account to buy a pot of gold, be sure to speak with a financial adviser for investment advice.