Avoiding The Boulders Of Financial Destruction

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.

generation of low inflation
We’ve had an entire generation of very low inflation!

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.

Uh oh!

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?

Remember, it’s up to YOU how you spend!  You don’t need to spend in the categories where prices are rising the fastest!


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!


[Image Credit: Flickr1,Flickr2]

18 thoughts on “Avoiding The Boulders Of Financial Destruction

  • December 19, 2021 at 7:56 AM

    My dividend income is growing 8-10% a year just with dividend increases. I will keep reinvesting and adding new money. I know that it is psychologically difficult to see out portfolio go down in value….but we should be happy to buy the same great stocks that we buy at a lower prices. Keep the great work!!

    • December 19, 2021 at 3:55 PM

      That’s some great dividend growth MarcosG! I wish more people had your sanguine perspective on stock movements, but alas…

  • December 19, 2021 at 1:44 PM

    So true the 6.8% inflation is rough, hopefully it moderates soon.

    I’m focused on keeping my cash balances low (normally they are a bit higher for convenience) since I don’t want that much money being eaten away by inflation.

    Trying to keep my money working in stocks with a little bit of bonds and ibonds sprinkled in.

  • December 19, 2021 at 3:30 PM

    Those of us, ahem, mature enough to remember double digit inflation in our early careers aren’t impressed with 7% inflation, yet. My first and only home loan was subsidized by the government and it was still 8.75%. House loans of over ten percent were common, normal even. But the economy adjusts, we just got much larger annual raises or sometimes two raises in a year and we made it through those years just fine. CD’s paid 12% if you can believe that and Treasury bonds paid out high rates as well. Later when inflation abated I kind of missed those big raises.

    • December 19, 2021 at 3:53 PM

      Thanks for the excellent perspective steveark! It’s nice to fine a ‘mature’ person that can still remember those days and give us some perspective. I was too young to really remember those days, despite the fact that I lived through that time period.

  • December 20, 2021 at 6:23 AM

    I’m not too concerned yet, and I’m well positioned to soften the blow with good holdings of TIPS and Ibonds. But the way the government has been printing money like crazy over the past few years including the covid relief does have me thinking that it’s going to get worse before it gets better

    • December 20, 2021 at 1:48 PM

      I agree that the stimulus is a large part of the cause of higher inflation, as well as huge demand for workers. It’ll slow down eventually.

  • December 20, 2021 at 9:45 AM

    I’m concerned. I’ve never seen this kind of inflation in my adult life. Everything is getting more expensive. Fortunately, we can avoid the most inflated categories because we don’t drive much. We also change what we buy at the grocery store a bit. This helps, but I don’t think we can avoid it forever. Just keep saving and investing. I don’t mind the stock market dropping a bit. It still seems overpriced, probably due to high flying tech companies.

    • December 20, 2021 at 1:47 PM

      Valid concerns, but I doubt higher inflation is going to last forever. This year wasn’t a good one for making financial progress, but it’s only a blip. Stay positive!

  • December 20, 2021 at 1:34 PM

    Thanks for your perspective, and especially this: “Honestly, I have no clue what 2022 will bring.”

    As for holding stocks, those of us in Index Funds – what choice do we have but to stay put. Curious why you’re a dividend investor and not an index investor.

    • December 20, 2021 at 1:39 PM

      This is false. I am not a “dividend investor”. I hold a variety of different investments, including index funds.

  • December 21, 2021 at 12:31 AM

    Mr Tako, thankyou for another great post with plenty to think about regarding inflation. It is also on a upward trend here in Australia as well.

    I will keep investing in good companies for the long term.
    Mr Tako to you and your family have great christmas and new year.
    Look forward to your next post as always.


  • December 22, 2021 at 4:43 AM

    In 1982, unemployment was far worse than it is today close to 11%. Today, unemployment is 4.2%, the economy is growing the fastest it has in years, the stock market is doing very well, interest rates are low, and we are not in recession or bear market. It is very different than 1982.
    Dividend Power recently posted…Build a Lazy Portfolio

  • December 26, 2021 at 3:52 AM

    Hi Mr Tako
    Good read! Inflation combined with these low interest rates makes it very challenging for so many, not just with regard to retirement.
    Investing in dividend growth stocks, tech growth stocks plus commodity businesses is important in my view. In fact, not being Invested and being in cash becomes more and more risky.
    SavyFox recently posted…Why NVIDIA is a compelling stock

  • December 29, 2021 at 1:56 AM

    Great post. And a good wake-up call that I need to take inflation into account a little more deliberately in our investing/spending plans, at least in the short term.

  • January 2, 2022 at 1:07 AM

    Inflation is nutso. I’m also a bit concerned for the first time ever about stocks as I was thinking about getting more into the US market!

    • January 10, 2022 at 1:01 AM

      One thing I’ve learned in any decision– a cautious human mind will always find things to be concerned about. The question is, can you live with the consequences if your concerns come to fruition?

      For me, that’s when I know it’s time to invest. I map out the different scenarios, and most of the likely outcomes. Can I life with those outcomes? I usually can.


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