There have been talks for the last several years about the potential for inflation, and the effects it would have on individuals spending, investments and lifestyle. The inflation rate has jumped around significantly throughout the 20th century, and it wasn’t until Reagan and Volker (in the 1980s) took the steps to “slay the inflation dragon” and get it to a more controlled level, without the wild swings in the past (it went from 4.7% in 1976 to 13.3% in 1979!).
Since the 1991, the inflation rate has stayed under 4% every year, and average around 2% for the last two decades. Whole generations have grown up without the threat of watching their purchasing power melt away over a short period of time. Some argue that the CPI (Consumer Price Index) is not measuring accurately, and that the key items for living (shelter, food, transportation, etc.) have been going up at a much higher rate than the CPI index shows. This is similar to the Monevator’s article on personal inflation rate I noted earlier in the year.
Now with the huge amount of government spending over the last year (added to the large amount of government spending since the 2008-2009 crash) has led to renewed articles on the potential for inflation in 2021 and its effects. Stocks continue to rise well above all levels of base P/E ratios, and more people are talking about a bubbles. So what can you do?
- Invest in stocks vs. Bonds. Bond rates typically don’t keep up with inflation rates, so you can lose buying power, while the stock price of companies tend to go up at a better rate
- Invest in hard assets to hedge (gold, oil, etc.). As the purchasing power of a dollar goes down, these items will increase in value.
- Real Estate: Inflation typically makes real estate values shoot up (see house prices in the 70s). They’re already on the rise now – which lends to the belief that we are already experiencing inflation
The last bit of advice I have in regards to this is the opposite of what you typically should do in times of high inflation. The base suggestion would be to take out loans (especially low interest loans) with today’s dollars, and then when the dollar inflates, you can pay the debt off with lower value dollars. My suggestion in times of high inflation is to pay off your debt – not take on more. High inflation times are uncertain times, and job losses and economic disruptions happen. Having little or no debt will help you to weather through these tough times.
My hope is that we don’t see anything major happen in the next decade or so. However, I am very concerned at the out of control spending at the federal level. It just isn’t sustainable.
Mr. 39 Months