How to Beat Inflation: A Measured, No-Panic Approach

How Long Will High Inflation Last?

Inflation hysteria is in full effect. When economic hysteria of any kind hits, I find it’s always best to break things down in a rational, actionable way. Amongst the overwhelming noise and panic, only a tiny portion is focused rightly on whether the inflation numbers that we’re currently seeing (6.8% y/y) are transitory (temporary) or here to stay for a while. Count me as a member of “Team Transitory”. The demand-side data reflects what most of us have lived since April of 2020 – a large increase in demand for goods (as people have spent more time working, exercising, and playing from home) and a decline in demand for services (as people aren’t out as much). The higher demand for goods has led to massive supply chain bottlenecks and more money chasing fewer available goods results in inflation. This is not just a U.S. phenomenon – it’s happening worldwide.




Here are the goods vs services expenditure numbers in the U.S. that show how the demand for goods has greatly risen, while the demand for services is still slightly below where we were just before the pandemic hit:

inflation - goods vs services

Separate from the supply chain bottleneck issues, OPEC and other oil producing cartels have coordinated a cut to oil production, which has resulted in higher gasoline and diesel prices and driven the cost of goods higher across the entire economy. At the same time, here in the U.S., we’ve been seeing the makings of a housing bubble for many years now, as foreign and domestic investors have flooded the market with first-time home buyers, boosting prices for a limited supply of housing units.

Why am I on Team Transitory? The pandemic supply chain disruptions seem very demand versus supply Econ 101 and I suspect industry will figure it out sooner than later. We’re finally starting to see a notable decline in gridlocked shipping container inventory, as a proof point. Oil prices just need a cartel defector, which is bound to happen eventually. And the housing market could cool down if we begin seeing the Fed raise historically low interest rates, which they have hinted will begin in 2022, in part, to help cool inflation.

Those are educated guesses informed by history, data, and the opinions of some economists that I respect. But, the reality is that neither I nor any economist, no matter their prior prognostication track record, knows exactly what is going to happen here. Micro and macroeconomic conditions are very unpredictable and can change quickly, even during relatively calm economic periods. This is no calm period – we’re truly living in unprecedented times with frequent pandemic-induced disruptions and a high inflation period could stick around longer than any of us like.

beat inflation




Whether it ends up being transitory or permanent, it’s easy to be spooked by inflation, particularly when the news media keeps beating us over the head with it (if I had a dollar for every “turkey is up 9 cents per pound!!” story during Thanksgiving this year…). There is certainly a possibility that the highlighted markets don’t stabilize in the near future and prices increase permanently in some sectors of the economy. Regardless of what happens moving forward, I always find it helpful to take reasoned action on things that I can personally control in these types of financial situations. In most cases, the actions I’ll highlight here are actions that you can gain from, no matter how long elevated inflation sticks around.

Inflation and Your Locus of Control

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:

  1. What we earn (income from wages and/or investments)
  2. 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:

  1. Income from wages
  2. Income from long-term investments
  3. Income from medium-term investments
  4. 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:

  1. make the case for a raise/promotion, if you’re not already receiving one
  2. 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’ve seen average hourly wages increase 4.8% year/year (November, 2020 to November, 2021). 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. There is a shortage of workers in most sectors of the economy, as the number of people who quit their jobs in 2021 reached a record high. The number of striking workers is the highest it has been in decades. Businesses are desperate for workers. By just about every measure, workers haven’t felt this empowered in a long time. Acting passive while others are empowered may be easier, but it’s a risky strategy that could result in lower wage gains.

2. Income From Long-Term Investments

As for long-term investments, we’ve seen the S&P 500 stock market increase just over 25% in the past year, with most other major stock market indices posting strong, double-digit 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, updated every 6 months, is currently at a 7.12% APR. 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. While total inflation has clocked in at 6.8%, non-food and non-energy goods prices have increased at a more humble 4.9% over the last year, with a big chunk of that being attributable to the auto sector. Used car and truck prices are up 46% versus 2 years ago, due to microchip shortages greatly reducing available new car inventory. New car prices are higher for the same reasons, though less dramatically (think MSRP serving more as a floor than a ceiling). It stands to reason that the auto industry will fix this supply chain disruption, and when they do, prices will revert. If you can hold off on buying a vehicle until that happens, you’ll come out ahead. It may even be worth looking into older used cars, sticking only to the cheapest new cars, or even using short-term leases to help bridge the gap to a more typical consumer-friendly auto market.

Of course, the biggest inflation culprit has been gasoline prices, which are up 58.1% in the past year (though still lower than 2011-2014). 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. Over the last few months, I’m usually paying $2.99 per gallon at Costco and seeing prices average about $3.59 elsewhere. That’s a savings of about 20%. 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 an electric or more fuel efficient vehicle are additional levers that you can pull to take the sting out of high gas prices.

Get a Jump on Rate Changes

We’re still near historically low interest rates for personal loans, but that will change when the Fed raises interest rates in 2022. We know that’s coming. If you have not already refinanced your debt, now is the time to do it, if the overall numbers makes sense.

Defer Payments, when Possible, Without Extra Cost

Where possible to do so without incurring extra costs or penalties, it might be wise to defer payments. The Biden administration just extended the student loan freeze through May 1, 2022, for example, so why pay student loans now if you are sure that you will also have the funds later (when the value of your savings could be worth less than it is now)?

Additionally, many companies are offering 0% financing to entice purchases. If you are going to make the purchase anyways, and the value of your future dollars is worth less than now, why not take advantage? Of course, the key here is to make sure you don’t get yourself in trouble – only do this if you are 100% sure you will have the funds in the future, so that you can avoid higher interest rates and/or other penalties in the future.

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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