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- Inflation: Buckle Up
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Inflation in the U.S. is currently being driven by a complex mix of factors, including supply chain disruptions, geopolitical tensions, a robust job market, and expansive government pandemic stimulus. Despite the Federal Reserve's aggressive efforts to control inflation, these elements have collectively kept prices stubbornly high.
The Personal Consumption Expenditures (PCE) Price Index, which the Fed prefers for measuring inflation, adapts to changes in consumer behavior, such as substituting goods based on price changes, offering a comprehensive view of household spending.
As the economy edges towards a potential period of stagflation, characterized by persistent high inflation coupled with slowing economic growth, the situation resembles the economic challenges of the early 1980s. This scenario complicates the Federal Reserve's task of managing inflation without precipitating a recession.
Understanding the dynamics captured by the PCE is crucial for shaping the Fed's monetary policy decisions, influencing everything from mortgage rates to credit card APRs.
What Can We Learn from the 1980’s
Drawing from the inflation battles of the 1980s under Federal Reserve Chair Paul A. Volcker, today's investors can glean actionable advice amid similar economic challenges. Here are key takeaways:
Avoid Short-Term Trading Risks: The 1980s showed that active trading during inflationary times is fraught with risk due to market volatility. Avoid making speculative bets on short-term market movements.
Embrace Long-Term Investing: History suggests that despite severe market fluctuations, long-term investors who remain patient often see substantial growth in their portfolios. Consider investing in broad-market index funds, which provide exposure to the overall market and reduce the risk of individual stock selections.
Focus on Diversification: To mitigate risks during turbulent economic times, diversify your investments across different asset classes, including stocks, bonds, and potentially real estate or commodities, depending on your risk tolerance and investment horizon.
Plan for the Long Haul: Volcker’s era demonstrated that significant downturns are followed by recovery and growth. Maintain a long-term perspective and ensure you have a solid financial plan that can withstand temporary downturns.
CJ’s Take : Where to Hide Out From Inflation
Commodities (incl. Gold): Our younger writers laughed when we discussed this but think of gold and commodities as your portfolio's chill friends who know how to keep cool when the financial weather gets stormy. It's like adding some sparkle and a dash of energy to your investments, making sure your cash doesn't just evaporate with inflation. No need to go full pirate treasure, but a little glitter could be your secret move to staying financially savvy. Let's mix in some shine with that strategy
Treasury Bonds: If the 10 year Treasury Bond gets anywhere close to 5% yield, go to your robo-investment platform and Buy! Buy! Buy!
Invest in REITs to Hedge Against Inflation: Real Estate Investment Trusts (REITs) offer a strategic opportunity to invest in real estate without the need for direct property ownership. Most of them have been terrible; Fundrise lost 12% last year! But they have bottomed and now is the time to invest in REITs again. Full disclosure: we offer a REIT investing in last-mile supply chains in America and its done pretty well with 6% dividends. Great hedge against inflation.
A Tip About TIPS ( Treasury Inflation-Protected Securities: NOW IS NOT THE TIME. A lot of people default to the suggestion of Treasury inflation-protected securities (TIPS) because they are great when inflation is on the rise. But now that inflation is at or near its top, TIPS don’t help you and will start to decline when inflation hopefully starts to decrease.So…forget them.
Inflation Changes How You Spend
What To Do? Your Game Plan for Inflation
Prioritize Spending: Separate expenses into "essential" (housing, utilities, groceries, transportation) and "non-essential." Reduce spending on non-essentials.
Use Budgeting Tools: Sign up for apps like Mint or YNAB. Connect your accounts to automatically categorize spending and set spending limits. Adjust monthly based on spending patterns.
Automate Savings: Download Oportun and link to your checking account. It automatically transfers money to a savings account based on spending analysis.
Consider Balance Transfers: If carrying high-interest credit card debt, use Bankrate to find a balance transfer card with 0% introductory APR. Transfer balances to save on interest, mindful of transfer fees and duration of the intro period. Plan to pay off within the intro period.
Cut Luxuries: Reduce spending on dining out, travel, and luxury goods as these are now significantly more expensive.
Manage Debt Wisely: Be aware of the impacts of inflation on variable-rate loans like student loans and mortgages, as payments could increase.
Adjust Investment Strategies: With increasing inflation and market volatility, consider safer or alternative investments and learn to navigate these effectively while avoiding scams
Curated For You
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