At times, it can seem impossible to get ahead in the world. Last week, the latest U.S CPI came out, announcing a 6.8% increase in consumer prices — the highest level of inflation the U.S. has seen in decades. The last time we saw inflation at these levels or higher was 1982! It’s been 39 years!
That’s an entire generation of people who have never seen inflation at these levels, and most of them are probably wondering what to make of it.
For anyone who didn’t receive a 7% pay raise this year, this high(er) level of inflation is Really Bad News™. Quickly rising prices are a huge financial setback for those folks trying to save for retirement, pay down debt, or even just trying to put food on the table.
Inflation, is what I like to think of as a boulder of financial destruction. Remember in Raiders Of The Lost Ark when Indiana Jones grabs the golden idol and triggers a trap that starts a giant boulder of destruction rolling toward him? It’s a classic movie scene everyone should know!
You can refresh your memory by watching it here:
In this case, the boulders I’m talking about are financial in nature. They won’t break your bones like the Indiana Jones boulder, but the end result is the same…
It’s coming for you. You can’t stop it. You can’t control it. You can only stay as far ahead of the boulder as possible and try not to get crushed by it.
Losing Ground In 2021
Back in April, when I first wrote about rising levels inflation, the Fed thought the rise in consumer prices would be “transitory”. Now, it’s December and inflation is reaching multi-decade highs. It looks like inflation isn’t going away anytime soon.
Three years ago, when inflation was a mere 2% or 3%, everyone practically ignored inflation. Sure, prices went up a little, but so did your salary. You still made financial progress. Any money you managed to save and invest meant you were “inching ahead” of that crushing boulder of financial destruction year after year. (As long as investment returns were higher than the rate of inflation.)
The trouble begins when inflation rates are high and wages don’t keep pace with that boulder. When final wage and inflation data becomes available for 2021, it’s likely that most people’s wages won’t have kept pace with inflation.
Meaning, we all lost ground in our race against that boulder. In 2021, we got just a little bit closer to being flattened by that boulder.
I don’t know about you, but when a giant stone boulder is racing towards me, I try to keep as much distance from it as I can.
The only real silver lining to 2021 was the booming stock market. The S&P 500 is up a very healthy 23% YTD. If you held lots of stocks in 2021, it might have been a decent year for you. (Although now that we’re in the final weeks of 2021, those stock market gains appear to be moderating a bit.)
Fighting Higher Inflation
So what can we do? To be honest, not a whole lot — but here’s a few suggestions to help keep you from getting squashed:
1. Hold assets that will succeed in an inflationary environment. This is one of the most important moves you can make during periods of high inflation. Some forms of real estate do well (such as apartments), and certain commodities will rise (like energy, food, etc.).
Other investments that might do well, are stocks with low capital requirements and significant pricing power. Pricing power is the ability to freely raise prices without losing customers, and it’s super important during times of higher inflation. For example, Netflix could easily raise prices 6.8% and most consumers wouldn’t blink an eye. They’ll just keep subscribing because Netflix has considerable pricing power. Grocery stores in contrast, might have a harder time passing on higher costs to consumers due to intense competition in the grocery sector.
TIPS (Treasury Inflation Protected Security) bonds would also be a reasonable asset class to hold as a bond allocation. The value of these bonds is tied to consumer prices, so the value will rise with the level of inflation. This amounts to a decent level of inflation protection for investors.
These are all examples of investments that will do reasonable well in inflationary environments. These kinds of investments are bound to rise with inflation, and with a little luck, you’ll do OK by holding them.
2. Don’t be afraid to change jobs. In my experience, most employers are loath to give large pay increases to existing employees. You’re more likely to see a large salary increase by switching jobs. This is one of the best ways to stay ahead of inflation, and now is an especially good time to switch jobs due to the high demand for labor. Use this to your advantage and find a higher paying job!
3. Try to tighten your belt and save more. This is hard to do in a high inflation environment where prices are rising rapidly. Essentially you have to be willing to cut into your luxuries — eating out, vacations, coffee outside of the home, and so on to really make a dent against inflation. It’s not easy, and will probably take some sacrifice. You can make up lost ground but cutting deeply into your regular budget, but not many people are willing to do this for very long.
Cutting back is probably fine as a temporary measure.
4. Avoid spending in areas experiencing the most rapid inflation. For example, used cars are ridiculously priced right now (up 31%), and new car dealers report that 87% of new cars sold for more than sticker price. It’s probably NOT a good time to buy a car right now. New or used.
To get the full breakdown of the different CPI categories, take a read of the latest CPI detailed expenditure category breakdown. It’s an exhaustive list. Clearly, some categories are growing much faster than others, and you can do well to avoid the categories with the highest price increases. For example, dairy products are only up 1.6%, and fresh vegetables are up 2.2%.
Hmm… cheese quesadillas with a side of guacamole for dinner?
Will Inflation Finally Moderate in 2022?
Honestly, I have no clue what 2022 will bring, but there’s always the hope that inflation will finally begin to moderate in 2022. The Fed has stated they intend to raise interest rates, so there’s at least the possibility inflation will slow down in 2022.
It’s not all good news however — higher interest rates do have a tendency to moderate (i.e. lower) stock prices as I discussed in my recent post Is The Economy Telling Me To Sell My Stocks?
Given the choice between quickly rising prices and falling stocks, I think I’d choose falling stocks. For me, sustained higher inflation is the greater of the two evils. Stock prices may decline for a few years, but good businesses will always continue to compound regardless of what the stock market is doing — They’ll compound, grow earnings, and pay-out higher dividends over time. Eventually the stock market will reflect these compounding facts, it might just take awhile.
Higher consumer prices however, do tend to be sticky. We won’t be going back to 2019 prices anytime soon. Once your utility bill goes-up for example, it doesn’t go back down. The same goes for rental rates and housing prices. They tend to rise and ‘stick’ to those higher prices due to a variety of societal factors.
All this adds up to a very challenging time for folks hoping to retire. It can also be disheartening for those people still saving for retirement. I get it, I really do — it feels like you’re not making any progress in life.
Frankly, it won’t be easy to get ahead of that boulder, but we’ve all got to keep trying! Just remember that high inflation levels didn’t last forever in the late 1970’s and early 80’s. It eventually inflation slowed down, and many people were still able to retire.
So stay positive, and have a little faith! We’ll eventually get through this!
Thanks for reading!