Tips for the Coming Inflation

• Author: Kelly Cooke
• Posted: 2024-05-08

While the Federal Reserve Bank says that inflation will remain low for a long period of time, it is only as a matter of time before all the government money pulsing through the economy will cause prices to rise. There is simply only so much that the government can spend before it begins to upset the delicate balance of the economy. The recent surge in interest rates reflects some of the overall fears in the economy that things may change in the future. Here is what you can do to protect your personal finances from future inflation.

Buy Big Ticket Items Now

If you are planning on making major purchases, now would be the time to do it. The same thing goes for real estate and other big ticket items like cars. When you lock the price in now, your monthly payments stay the same no matter what happens with inflation. While real estate prices seem high now, they will only increase in the future along with prices. Getting into the real estate market now will make your home more affordable later on when you lock in a purchase price and interest rate.

Don't Pay Some Debt Off Early

While it makes sense to pay off some debt like credit cards no matter what, paying other debt off early does not make sense if prices will rise in the future. It is better to let your debt be devalued by rising prices because your salary will rise along with inflation. A dollar today is worth much more than a dollar tomorrow, so things like your mortgage and student loans are better paid off in the future when inflation has taken a bite out of them.

Get Invested

Stocks generally perform well in inflationary environments. Corporate earnings increase because companies are charging more for their goods and services. The shrinking dollar is reflected in rising asset prices. It is better to have your money working for you than sitting in your bank account. While you should keep a cash reserve, any money that you do not have invested earns a negative return because your interest rate on it does not match the rate of inflation. It is better to be as close to fully invested as you can if you expect prices to surge in the future.

Stay Away from Bonds

Although you should invest your money, you need to be careful where you put it. Bonds are usually the worst performing investment in inflationary periods. This is because people need higher yields to make up for the fact that their money that they have lent is eroding. Higher yields mean that the price of the bond falls because there is an inverse relationship. Of course, you should be looking at investing in bonds when you think that the surge in inflation may be over because you can lock in a higher rate of return for your money. If you are going to invest in bonds right now, make sure that they are the type that has inflation protection.

Buy Physical Assets

The best thing to own during an inflationary time is gold because that is where people put their money to protect it. Gold surged during the summer with the expectation that the U.S. would spend its way out of the pandemic, but its price has stagnated in the new year. There is still plenty of opportunity for precious metal investors. However, those looking to invest in other physical commodities such as oil may have missed the boat as the price per barrel has increased. Be careful about holding commodities other than precious metals because they fall fast when an inflationary cycle ends.

Lock in Expenses Now

Beyond making big ticket items, if there is a way to lock in longer term prices on anything, now is the time to do it, This includes having multi-year subscriptions. If you are going to get any kind of educational certificate or start a degree program, you could at least lock in the first year of it, knowing that the amount that you owe will be devalued in the future.

The U.S. has not experienced high inflation since the 1970s. While we will never reach those levels of inflation again, a return to where we were in the late 1990s is a possibility. Preparing now for it can help you deal with the asset changes ahead.