Some people may tune out any talk of inflation, chalking its presence in the media up to fear-mongering (a handy scapegoat!) or laughable economic miscomprehension. “Why worry about inflation, when deflation is clearly the threat?,” so many commentators cried a few months ago. But if all one cares about is the short-term, then one won’t be prepared by the time the long-term arrives. With all the money printing going on at the Fed, only two scenarios are really possible: super-inflation (in correlation with the amount of money printed, which is higher than at any other time in U.S. history) or high interest rates (to stem the inflation).
One simple example of inflation: when a penny is worth more as metal than as money.
When inflation starts to kick in, governments everywhere are probably going to have to respond with higher interest rates if they hope to avoid the prospect of hyperinflation. Hyperinflation sounds extreme, but one doesn’t need to see triple-digit inflation in order for an economy to start spiraling into a hyperinflation scenario. And more importantly, super-inflation of some form won’t be as noticeable if the inflation is exported to all other countries around the world. Why does that happen? It happens because the U.S. dollar is the world’s reserve currency. That’s why China, Russia, France and India would all like to see a new supracurrency to take the place of dollars. It’s a conflict of interest, plain and simple.
In any inflation scenario, there is a window of opportunity between the time when inflation becomes noticeably uncomfortable and when it becomes a bigger problem. Higher interest rates step up to the plate before inflation can turn into hyperinflation.
So I’d like to consider the ways that you can prepare for what *might* be the more likely inflation scenario. These are basic strategies which differ slightly from what you can do to protect your money from hyperinflation, so I’d suggest you consider both and integrate them into your own plan.
**As any consumer knows, higher interest rates are bad for borrowers, but good for savers.**
The most important things you can do in preparation for double-digit inflation are to:
(1) pay off your debts and
(2) put more money into savings that pay you at rates with rising interest rates.
Pay Off Your Debts While Interest Rates Are Still Low
We may never see interest rates this low again for a very long time. Right now central bank rates in Canada and the U.S. are both at 0.25%. I’ve checked my credit card bills and that translates into a lot less money I would have to pay to carry a balance.
It’s always a good idea to pay off your debts as soon as possible anyway, but if you have languishing credit card debt or even if you never put extra lump-sum payments onto your mortgage, now is a good time to reconsider your strategies.
The sooner you pay off your debts with lower interest rates, the less money you will end up spending on those items you paid for with credit.
As soon as the economy starts truly recovering again, oil prices are going to rise even further, and rising oil prices always lead to inflation pretty quickly – couple that with the massive new injections into the money supply on the part of most OECD governments, and you’ve got a recipe for an inevitable increase in interest rates everywhere. That’s because higher interest rates are the only way to stem inflation and keep a country’s currency from depreciating.
Move Money Into Inflation-Protected Investments
Put your money into something that will “float with the rising tide,” as I like to say. Some vehicle that pays you an increasing amount based upon the increase in inflation.
TIPS – These are American Treasury Inflation-Protected Securities. These pay interest, like other Treasuries, every six months and pay you back the principal when the note matures. The interest paid on these is automatically increased to keep up with inflation (that is, inflation as it is measured by the CPI, which, conveniently for the U.S. Treasury, doesn’t take all price inflation into account). While these are not ideal, some have argued that it is the best we’ve got.
Real-Return Bonds – This is Canada’s version of TIPS. Investing in a real return bond fund or ETF means the returns reflect the cost of inflation, so that you effectively won’t lose any purchasing power when you receive your interest from these bonds.
Inflation-GICs (I-GICs) – Inflation-protected Guaranteed Investment Certificates. These are also a Canadian product. Like TIPS, they protect your principal while indexing the interest to inflation. As AEGON puts it, the “Inflation GIC (I-GIC) is a guaranteed investment contract designed to provide stable value portfolios with a long-term hedge against inflation…monthly interest payments are indexed to the Consumer Price Index (CPI), providing higher returns and lower volatility during inflationary periods.”
Dividend Aristocrats of Consumer Staples – Even in an inflationary environment, people will continue to eat and brush their teeth. Consumer staples companies such as Proctor & Gamble (NYSE: PG) or Kraft Foods (NYSE: KFT) are usually poised to do well with inflation. They simply pass on rising costs to consumers. This is why your food becomes more expensive – remember? So why not get on the other side of the fence and receive some of that money back in the form of dividends. As the company makes more money, it will often increase its dividend, too. The difference here from TIPS and GICs is that your money is not guaranteed. It is not without risk, since its value depends on the market and not what the government guarantees it will pay you back.
There will be other versions of these and more options in your local economy. If you live in India, Australia, Phillipines, or elsewhere – let me know what your country provides in the way of inflation-protected investments and I’ll add it here.
There are additional moves you can make to stem off high inflation, too – but these apply in any economy as part of a good money-management strategy. What are they? Earn more. Spend less. If you think we’re about to head into a period of higher than unusual inflation, it’s a good time to seek out that raise if possible, or take on another new job that pays more, if you can find one. And it’s always a good time for retooling your budget and finding items that can be chopped or reduced.Related Posts
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