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.
If you liked this post, why not subscribe to my blog for free updates and get these delivered right to your reader or by email? Also, feel free to connect with me on Twitter.
Related Posts - Why You're Wrong If You Think Gold at $2000/oz Is Unlikely... or Worse, Just a Bubble
- Market Risks and Challenges That Lay Ahead in the Second Half of 2010
- New Credit Card Rules For U.S. Consumers in Credit Card Lending Overhaul of (CARD) Act
- Good Time For Canadians and Americans To Buy UK Dividend Stocks For Income on the Cheap
- Peter Schiff's New Book: (3) What You Need to Know About Invisible Inflation and The Stimulus Scandal
Related Articles From Other Websites
{ 12 comments… read them below or add one }
Hey Money,
Shouldn’t there be a distinction made between fixed and variable-rate debt? Long-term fixed debt (such as a traditional mortgage) can be a really good friend through inflationary times, especially since your income will probably rise while the monthly payments are always the same. And if you got in recently at 5-6% or so, there’s probably even less of an urgency to pay it off quicker.
Also, do you know about the prospects of REITs when it comes to inflation? I’m thinking about buying some Vanguard REIT (VNQ) to produce a bit more income for my portfolio and get at least some exposure to the real estate market since I’m several years away from being in the market a home. I’m curious about what to expect in an inflationary environment.
@Blake – yes, thanks for pointing that out. Fixed-rate mortgages could still present a problem, though, if your own income *doesn’t* increase while all your other expenses do. You might not automatically get a raise, etc. To counter this, buy dividend stocks, whose companies probably will pass on profits from higher prices. As for REITs, you can own them individually or through an ETF. In my experience you’ll see more income with the individual REITs. Even when ETF fees are small they still seem not to produce as much by way of income.
Printing more money doesn’t mean money supply is growing at a fast pace.
In fact, money supply growth has slowed.
@MLR: “In fact, money supply growth has slowed.” …. yeah but over what time period? The last month? That wouldn’t be meaningful compared to the amounts put into the system over the last 8 months or so.
No, since Early 2008… right before they started printing more money. (Their actions make a little more sense when you look at all of the data)
So the fear truly is deflation. There is monetary policy that can deal with inflation. Right now, they can’t do as much if deflation hits… the rates are already as low as they’re gonna go.
It’s the same monetary policy for deflation as for inflation: manipulating the interest rates and controlling the money supply. Just in two different directions. What data are you using to show the money supply has decreased?
You didn’t finish reading my comment: “There is monetary policy that can deal with inflation. Right now, they can’t do as much if deflation hits… the rates are already as low as they’re gonna go.”
As I said, they can’t use monetary policy to combat deflation right now… the rates can’t go much lower.
I didn’t say monetary supply has decreased, but I did say that the growth has decreased (meaning it’s still growing but not as fast).
Look at Shadow Stats calculations of M3… in 2006 to 2008 M3 was blowing up (almost getting to 18% annualized growth!). In early 2008 M3 started to take a fall, getting to an approximate 6% growth. In the years before they stopped releasing official M3 numbers (2003-2006), M3 was hovering around 6%.
M3 is finally stabilizing around a sustainable number for the time being, and I’m sure they will react accordingly if things change.
But yeah… inflation is fear mongering at this time.
@MLR – yes, of course I read your whole comment:) And I understand what it means for growth to decrease as opposed to absolute supply:) However one interprets the data, when inflation does become more noticeable the concern is what to do – that’s what I was trying to address in the article. I’ve published on ShadowStats here before. They’ve stopped releasing M3 figures, so we can only go by the announcements we get about what the Fed is doing.
Gotcha, I assumed you hadn’t read it because you said “It’s the same monetary policy for deflation as for inflation” when I had already addressed that it wasn’t applicable to deflation at this point
I don’t think SS has stopped releasing M3 data, it seems the graph is updated as of 7/13.
I think the article is fine if its a general “What to do if there is inflation”… I just think it is silly to dismiss the idea that deflation is the real concern right now. That’s all!
I agree that if you expect double inflation to show up over the next few years, the best strategy would be to get a fixed rate loan and buy real estate or dividend stocks.
I don’t believe that we are going to see any high inflation however. Maybe the typical 3%-4% on average over the next decade. When everyone is telling me that we are going to experience an inflationary environment, I keep thinking that the herd must be wrong again.. Anyway, my dividend stocks would do great in a higher inflationary or a normal environment. My fixed allocation would do ok in a deflationary environment.
Has anyone considered purchasing gold? I haven’t but I like the idea of collecting and playing with gold coins..;-)
@DividendGI – I can’t remember now why I didn’t also include a section in here on gold – maybe because I’ve already written so much about it – but yes, obviously, gold is another way to store the value of your money and protect it.
Also, heard a new phrase recently to describe the phenomenon of “exporting inflation” – it’s called “competitive debasement” of fiat currencies. Nations want to protect their exports to the US (if they are a major trading partner), so they weaken their own currencies to “keep up” with the weakened dollar.
If there’s really going to be double digit inflation which I really REALLY doubt, then it’s all about buying assets and mortgaging yourself to the hilt!