Time To Ready Yourself For Inflation

Time To Ready Yourself For Inflation

That Fed chair Jerome Powell dropped the concept of transitory inflation in his testimony before Congress today is notable, but maybe not surprising. It’s not as though rising prices have been invisible to the many who have been paying them.

The push to refer to inflation as transitory has likely been a combination of politics and not wanting people to panic. Many people suddenly worrying about prices rising and either hording some goods today to avoid being hit with higher prices, or, instead, cutting back on spending and keeping hold of the cash they have wouldn’t be good for the economy.

There would be the chance of additional inflation or, the opposite, deflation, which is generally a bigger worry according to economists. Lack of spending might push companies to start lowering prices, causing people to hold off on buying with the assumption that prices will keep dropping. Then the economy can fall into a pit, where it would take massive stimulus to get it moving again.

But an important point in all this is how people on all sides of this are selling ideas as hard as they can, whether the voices that had been warning of the inflation bogeyman or those that said the notion was silly. The only clear thing is that no one knows what will happen.

It’s even unclear whether all the theories about inflation and how it works are right. A working paper from Federal Reserve senior adviser in the program direction section Jeremy Rudd from September 2021 questions whether a dead-on orthodox position that inflation expectations of the public affect inflation rates is true. Or, as Rudd wrote in his first line of the introduction, “Mainstream economics is replete with ideas that “everyone knows” to be true, but that are actually arrant nonsense.”

For ordinary people, this may not be a soothing concept. With trillions of dollars having been pushed out to keep the economy from slipping into the brink, there’s a lot of cash awash. At the same time, the velocity of money—how quickly a dollar gets turned over in one transaction after another, is another factor and the velocity has been taking a long-term tumble since the late 1990s, as the following graph from the Federal Reserve Bank of St. Louis shows.

Bring this up to many who are almost gleefully looking toward a future of hyperinflation and they’ll come up with some reason or other why it doesn’t matter. Maybe they’re right. Then again, maybe not. Who knows?

Still, higher inflation—well, relatively higher inflation if you talk to people who remember the late 1970s and much of the 1980s, when inflation was definitely into double digits—is around right now and it might be wise to plan. Here are some strategies.

Don’t bail out of your investments. If it’s necessary, if you need the cash and there are no other options, then, yes, sell off and redeploy capital. (Remembering that, depending on how you hold the investments, there may be tax penalties.)

Look at additional investment areas. Consider expanding the types of investments you hold. Treasury Inflation Protected Securities from the federal government guarantee interest plus additional amounts to keep pace with inflation. Real estate has been offering strong growth, though you might be better off shares in a real estate investment trust (REIT) rather than trying to directly purchase property, as REITs will generally be more diversified in their holdings.

Spend less. When prices are rapidly rising, your spending patterns will only grow. Figure out where you can cut back. Also, considering checking what aspects of inflation are driving the bulk of the rise. Maybe if you can better control energy spending, for example, if that’s one of the big growth areas.

Borrow. Although it’s best to control your spending, if you must buy something substantial, consider a loan. As inflation rises, the value of money drops. That means the dollars of future loan payments aren’t worth as much, so you effectively spend less.

At least, that’s how the theory goes, and we know the ideas that everyone knows to be true could turn out to be arrant nonsense.