Inflation and Your Locus of Control
When it comes to inflation, let’s first talk about the things we can and cannot control. For starters, no individual – not even the President of the United States – has the power to fix the global supply chain, cap gas/oil prices, or flip housing market supply and demand dynamics. We’re all at least somewhat captive to the markets as they currently are in terms of the prices we pay for certain goods and services. If, for example, a monopolistic internet service provider or toilet paper manufacturer decides that they are going to take advantage of this situation and gouge consumers, there is little that we can do other than to grin and bear it.
What can we control? Much more than we think.
Personal finance, at its simplest, purest form can be distilled into 2 categories:
- What we earn (income from wages and/or investments)
- What we spend
And whether or not we lose ground against, keep up with, or firmly beat inflation depends on how we each individually perform in these 2 quintessential areas. Regardless of whether inflation is temporary or permanent, there is much that we have control over within both categories that can allow us to not just break even, but even come out ahead if we play our cards right.
How to Beat Inflation with Income Variables
When it comes to beating inflation on the earnings and income side of the ledger, I think it’s best to break things down into 4 income variables:
- Income from wages
- Income from long-term investments
- Income from medium-term investments
- Income from monthly cash-flow
1. Income From Wages
Let’s start with wages. If you haven’t already, right now is a great time to:
- make the case for a raise/promotion, if you’re not already receiving one
- find a better paying job
Why? When inflation goes up, wages almost always go up as well (and can even be a direct contributor). In the U.S., we saw average hourly wages increase quite a bit when inflation increased. The “Great Resignation” has helped drive much of this, as there seems to be nothing like a life-threatening, door-shuttering health pandemic to make people re-evaluate their current work situations and put in the work to find better, higher-paying jobs.
2. Income From Long-Term Investments
As for long-term investments, we’ve seen the S&P 500 stock market increase by roughly 2X in recent years, with most other major stock market indices posting similar strong gains. Historically, stocks have a mixed performance record during high inflation environments, but more often than not, stock markets tend to outpace inflation during these periods and during the long term. Staying primarily invested in stock equities (I prefer passively investing in index funds) versus fleeing to cash is an essential ingredient to staying a step ahead of inflation over the long haul.
3. Income From Medium-Term Investments
Meanwhile, any medium term savings for large upcoming expenditures (e.g. vacations, vehicles, medical procedures, housing, etc.) that is sitting in cash or low-interest bank deposit accounts is losing spending power over time, given current interest rates hovering just above 0%. With this bucket of savings, I’d suggest taking a look at U.S. Treasury issued Series I Savings Bonds. I Bonds are meant to perform at or near current inflation rates, and the new I Savings Bond rate is updated every 6 months. Note that I Bonds must be held for a minimum of 1 year before you are able to cash them out, and there is a 3-month earned interest penalty for issues redeemed prior to 30 years. You can buy up to $10K per Social Security Number in I Bonds online per calendar year. I have put together details on how to buy I Bonds at treasurydirect.gov.
Additionally, if you are eager to find short and medium-term investment opportunities as a hedge against inflation and complement to your portfolio – real estate, gold, commodities, and inflation-linked bonds tend to perform well during high inflation periods. The challenge with these types of investment hedges is that they are temporary and it’s nearly impossible to time the market to only be invested in these types of assets during inflationary periods. If inflation were to decline (inevitable, but unpredictable), there is a good chance that these investments would follow suit.
4. Income From Cash Flow
And, finally, there is the monthly cash flow bucket. These are the funds you need to keep in highly liquid deposit accounts so that you can pay your bills month-to-month. With a little searching, you should be able to find a number of high-yield savings accounts that will earn a few percent APR on balances under a specific amount (e.g. $10K, $20K, etc.). This is the least important bucket of the four over time. The goal here should be to keep the amount of money in this bucket to just what you need for monthly cash flow (with a few extra months safety margin built in). You’re probably not going to outpace current inflation rates with this bucket, but you don’t really need to. Liquidity is more important than saving a few dollars in earnings power. In other words, don’t stress too much here on interest rates.
How to Beat Inflation with Spending Variables
Now, let’s break down a few things that you can do on the spending side of the personal finance ledger to beat inflation.
Make Informed Categorical Spending Decisions (e.g. Auto, Gasoline, Food)
We can’t just lump all spending together – there is a lot of variance in price inflation, depending on spending category. And having some categorical inflation data (here and here) can help you make informed spending decisions. When it comes to transportation, for example, it may be worth looking into older used cars, sticking only to the cheapest new cars, or even using short-term promotional leases.
Then there’s gasoline prices. There’s a lot that every individual can do within this category. If you’re not buying Costco gas, for example, you may be paying more than you need to. I typically pay about 10% less per gallon at Costco than elsewhere. You can use GasBuddy to check consumer-reported prices locally. Reducing gas consumption is another route (more on that in a bit).
You can even calculate your personal inflation rate to see how spending in various categories has changed for you, and then take action on that.
Buy in Bulk (But Don’t Hoard)
The other big inflated spending category of significance right now seems to be food. Some of those price increases are due to supply chain disruptions, some due to consumer hoarding, some due to climate and weather hitting crop yields extra hard, and some due to higher gas/diesel prices. Companies with more monopolistic/oligopolistic market positions (e.g. paper products, meat) are more likely to raise their prices during this time simply because they can. I’ve been buying in bulk from Costco and elsewhere for many years, based on regular per unit price comparisons that I make between those bulk purchases and regular-sized purchases. Here’s a grocery price list spreadsheet I put together just for that purpose.
When I say “buy in bulk”, I am referring to larger unit volume purchases (e.g. 32 oz. peanut butter jar versus the typical 16 oz.). I am not referring to hoarding a large number of units. As we saw with the great toilet paper run of 2020, when people freak out and irrationally hoard items it creates even more supply chain disruptions and further incentivizes companies to raise prices – creating a vicious upward price spiral cycle. Let’s not contribute to that.
Temporarily Change your Consumption Preferences
With higher meat prices, for example, would it hurt to shift a few meals per week from a meat-based protein source to a plant-based protein source? I was able to save thousands by shifting to a more vegetarian diet. I’m not strictly a vegetarian these days, but a majority of our meals center on plant-based protein versus meat. In my opinion, it tastes better, it’s better for the environment, it’s healthier, and it’s cheaper. It’s also worth noting that most of us consume more protein than our bodies can use, and protein is expensive these days.
Take gasoline prices as another example where we have a lot of agency in changing our consumption patters. Reducing commuting miles, biking more, consolidating shopping trips, and swapping your gas hog for a fuel efficient vehicle (or cheap electric car) are additional levers that you can pull to take the sting out of high gas prices.
Re-examine Monthly Recurring Expenses
I touched on it in my year-end financial checklist article, but it’s worth bringing up again: shine the light on every single monthly recurring expense that you have and trim all of the fat. Maybe your mobile network raised its prices recently, maybe you have a few subscriptions that you rarely use or forgot about, maybe you haven’t re-shopped your insurance plans in a few years – most of us are going to have some fat in our monthly spending that could easily be trimmed.
Beating Inflation: The Bottom Line
Inflation can be frightening, particularly when the media and your peers build up the fear. My sense is that current high inflation numbers are transitory, but whether high inflation sticks around for a long time or dissipates in the near future, the important thing to know is that there are many things that you can do on both the earning and spending side of the personal finance ledger to put yourself in a much better position. In other words, none of us are passive victims here – we have some agency to beat inflation. And, thankfully, the actions that you can take to beat inflation are usually best practices that can help you improve your personal finances at any time – not just during high inflation periods.
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