As a child of the ’70s, I was very aware of inflation, even if it didn’t seem to affect me directly. I don’t remember the price of a pack of baseball cards or a Marathon bar soaring.
But it was in the news all the time. People seemed to be upset by it. I had more important things to worry about – like hoping to see some Yankees in my new pack of baseball cards.
Today, inflation is at the highest point it’s been in my adult life, which spans 30 years.
Prior to this year, starting in 1992, per the consumer price index, U.S. inflation rose above the annual historical average of 3.2% only three times, reaching a high of 3.8% in 2008. Each time it eclipsed the average, it fell the following year.
Today, inflation stands at 5.3%, and I expect it to head much higher.
We have a perfect storm of events and policies that should shoot prices significantly upward, including…
- Government spending. The government plans on spending trillions more in the next few years. Regardless of what budget or bills get passed, the economy will be sloshing around with newly printed dollars. All that money chasing limited goods and services will drive prices higher.
- Zero interest rates. The accommodative policy of the Fed makes borrowing money dirt-cheap and adds to the spending frenzy going on right now.
- The pandemic. The lockdown created pent-up demand for goods and services. And while things were closed, Americans saved cash and paid down debt. Now, like their elected officials, they’re going back to spending money like a spoiled teenager with rich parents.
- Supply chain constraints. Due to labor shortages and other issues, there are not enough raw materials, finished products and available services, limiting the supply of those goods and services as demand surges. That is inflationary.
At some point in the next 12 to 24 months, I would not be surprised to see a spike in inflation to the high single digits or perhaps even higher. Those kinds of numbers would greatly erode your buying power – so you need to prepare for it now.
Here are three actions you can take…
- Own Perpetual Dividend Raisers. These are stocks that raise their dividends every year.
If you’re receiving more income from your dividend stocks each year, you should be able to maintain and hopefully increase your buying power instead of seeing it decay due to inflation.
- Keep fixed-income maturities short term. You don’t want to be locked into a fixed-income product for years in which your income doesn’t rise.
If you’re earning 4% today and inflation hits 6% or 8% in the next year, you’re losing buying power. If your maturities are short, you’ll be able to reinvest the cash as it matures at higher rates.
- Look for variable-rate products. There are some bonds whose rates are variable depending on inflation or other factors. Those will help you maintain your buying power as inflation rises.
Perhaps the best thing I could have done to beat inflation was hang on to those baseball cards. But since Reggie Jackson can’t help me, I’m taking the steps mentioned above to make sure rising prices don’t destroy my buying power.