Dealing with Inflation

The coronavirus pandemic took its toll on the hospitality, travel, food service, and retail industries in early 2020. The U.S. government subsequently stepped in to provide relief funds to displaced workers and hard-hit employers alike. Fast forward to the early months of 2022, and the consumer price index (CPI) has climbed to its highest level in 40 years. For Americans, higher prices are being felt at the gas pump and the grocery store, and supply shortages continue to mount. While some consumers feel that inflation is a drag on the economy, moderate inflation can lend itself to economic growth. Conversely, high inflationary periods can foster uncertainty and confusion among consumers. While the dollar will not stretch as far in a high-inflationary period, making adjustments to your personal investment strategy, controlling non-essential spending, and postponing high-dollar purchases can help you overcome the effects of an inflationary climate.

Investment Strategy

Investing in asset classes that perform better on average than the market can be advantageous during a period of inflation. A diversified portfolio with productive assets (i.e., stocks) can help an investor combat market inflation. Try to invest in companies that can raise prices in an inflationary period to offset rising costs–these companies tend to perform better than those without control over pricing. Furthermore, companies with low capital needs tend to outperform those that need to invest more money during a period of rising prices in order to stay in business. Industry sectors that tend to perform well in a high inflation environment include utilities, energy, consumer staples, real estate, and healthcare.

Discretionary Spending

The fewer non-essential purchases made during a period of inflation, the more control one has over expenses, which can help when adapting to rising prices. Creating and tracking a personal budget is a great way to see which areas of spending can be cut. For retirees on fixed incomes, the need to decrease spending on food, housing, and transportation may not have the same impact as it does on those still in the workforce. This is particularly true for retirees who have already downsized or made significant changes to these areas of spending as a result of retirement. Nonetheless, rising healthcare costs and less purchasing power can be problematic to current retirees. For those individuals with more time until retirement, investing money now is still a good strategy to aid in keeping up with inflation levels over the long-term. Lastly, investing in oneself can position you to be the best at what you do. Find ways to foster your knowledge or talent to position yourself to be more valuable to your current employer or to advance your career. Money spent on additional education does come with a cost, but it can be offset with future income at a higher rate.

Large Purchases

A global computer chip shortage coupled with supply chain delays contributed to the rising costs of new vehicles. What’s more, the CPI for used cars and trucks rose by 40.5% between January 2021 and January 2022. While timing is great for selling a used car, postponing a decision to buy a new vehicle may prove beneficial for a buyer in the current market.

Additionally, the surge in demand for housing, coupled with the difficulty in securing a mortgage loan, gives buyers less purchasing power, and is forcing some consumers to rent at higher rental rates or for longer periods of time.

It is not known whether inflation will continue to rise or when it might recede. However, assessing your current investment strategy and consumer-buy decisions will make you better prepared to handle the current market conditions both financially and emotionally.