Recently, my brother asked me how concerned he should be about inflation.
My response was the same as that of Geena Davis’ character in the 1986 film The Fly: “Be afraid. Be very afraid.”
I was half joking.
U.S. inflation currently sits at 5.4%, the hottest level in three decades. Government wags like Jerome Powell and Janet Yellen say inflation is only temporary. By the way, the shortened version of the idiom “wagging the dog” refers to when someone creates diversion from a scandal, but concerning Powell and Yellen, I prefer to think that “wag” stands for “wild a$$ guess.”
In the November issue of The Oxford Income Letter, which comes out on November 9, I will officially raise my inflation forecast. And if you’re skeptical, just remember that last year, I was one of the first to say inflation was going to be a problem in 2021.
Supply chain constraints and increased demand are not only leaving store shelves empty but also leading to pay increases for workers. Add in additional government spending and all of that cash sloshing around, and prices will go even higher as we chase a limited supply of goods and services.
Inflation is like a parasite. You don’t realize you have it until one day you wake up sick – except in this case, it’s your wealth that suffers.
From 1914 to 2021, the historical average of the U.S. inflation rate has been 3.24%. That doesn’t sound like much. But after five years of inflation being at the historical average of 3.24%, what used to cost $1,000 now costs $1,172. In other words, you need 17% more money to buy the same goods and services.
At 5.4% inflation, you need 30% more money. That’s just after five years.
My brother’s next question was a valid one: “What do I do about it?”
I explained that it depends on what part of his assets we’re talking about. Steps to take with your cash are very different from what to do with your longer-term holdings.
Below are a few things he (and you) can do to protect assets from inflation.
For your long-term funds, I strongly recommend investing in Perpetual Dividend Raisers. These are stocks that raise their dividends every year. This way, you’re growing your income, and if the dividends are boosted at a higher rate than that of inflation, you’re actually increasing your buying power.
Look for companies that have a track record of annual dividend hikes that continually rise by a meaningful amount. Raising the dividend 1% per year won’t help much.
A company like Enbridge (NYSE: ENB) has raised its dividend every year for 26 years. Over the past 10 years, the compound annual growth rate of the dividend is 10.9%. That should keep investors well ahead of inflation.
Readers of my newsletter, The Oxford Income Letter, were told about Series I bonds months ago. I bonds are U.S. government bonds whose interest rates reset every six months according to inflation.
The November I bond rate will be announced today. It is expected to be around 7% annualized.
You can’t cash out of the bond within the first 12 months after your purchase. If you sell before five years pass, you lose three months’ worth of interest.
But these bonds will keep pace with inflation, protecting your funds.
The maximum you can buy is $10,000 per person per year, plus another $5,000 if it is purchased with a tax refund.
This is a great way to hedge against inflation without risk, as long as you don’t need the cash within one year.
To buy I bonds, visit the TreasuryDirect website here.
This one is tougher. You won’t get adequate inflation protection with a short-term investment. Interest rates on money market accounts and certificates of deposit (CDs) are just too low. While interest rates on Treasurys have inched higher, rates for savers have barely budged.
In regard to your short-term cash that you need access to within a year or so, you won’t be able to earn 5%-plus on it without taking on some risk.
You can search online for the best money market or CD rates.
I wish there were a better answer, but there simply isn’t unless you take on risk, which is precisely what you don’t want to do if you need the cash in the near term.
I expect inflation to continue higher this year and into 2022. I believe the most important financial step you can take these days is to ensure that your buying power isn’t destroyed over the coming years.