Is Inflation Everywhere?

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Have you noticed how everything is so much more expensive lately? Gas prices stick out like a sore thumb, but at least that fluctuates all the time and can go down in the future. The increase that is most scary to me is the restaurant prices in my area. What used to cost $8 or $10 a meal is easily $15 now. We got takeout from a sushi restaurant the other day and the place charged us $28.95 for a sushi combo, which was a 30% increase!

Even video games are trying to raise prices. I don’t have a Playstation 5, the next-generation console that came out last year. But a new game came out for it and they are charging $69.99 for the game when the norm for a new release has been $59.99 for years.

Emma told me that grocery prices have gone way up too. And we aren’t talking about a 1%, 2%, or even 5% here. Some things have gone up by 20% or 30%. Yikes!

Have I Just Been Spoiled by the Lack of Inflation All My Life?

Maybe I’m overreacting because I really haven’t really experienced inflation in a big way my whole working life. Sure, there’s been some inflation, but the price increases have always been massed for me in a big way because my lifestyle has changed so drastically in the last twenty years or so.

Take electricity costs for example. Energy costs have certainly gone up over the years, but it’s hard to really isolate the pain when I’ve just been consuming more as my family has grown and I’ve moved to bigger houses. Same thing with costs like property taxes and such. I’m primarily paying more because I have moved once or twice.

I’ve also found ways to drastically cut my costs on services that keep raising prices. Cable TV subscription prices go up steadily, but I’ve decided to cut cable a decade ago. Gas costs have gone up over the years too, but I’ve driven less. A cellphone costs more now, but I dented the impact by moving to a discounted carrier and saving each month. In fact, I pay less monthly now than when I was with T-mobile on my bare minimum plan when data plans weren’t even a thing.

I even spend less on health insurance. We use a Christian healthcare sharing ministry and pay less than $300 for a family of four. That’s about how much I was paying over a decade ago per person and my employer was heavily subsidizing the costs.

The bottom line is that whenever one thing increased its prices, I found three other ways to lower my expenses.

And speaking of cutting costs, the pandemic has really driven my expenses way down. During the past year, gas costs, eating out, general entertainment, and vacation costs have all practically gone to zero.

Now that places are once again opening up and price increases are flaring up everywhere, there won’t really be any room for me to cut costs to counteract price increases. Is it time for me to face the inflation music? How should I prepare? How should you?

Inflation in The Bigger Financial Picture

It’s important to consider what the wealth-eroding effect inflation can have on your financial plans too. Inflation reduces your purchasing power, and it can mean that today’s dollar won’t go as far in future years. Essentially, inflation guarantees that what you save now won’t be worth as much in real terms a couple of decades down the road. It’s important to plan ahead and make moves now so that your nest egg will be big enough – even after inflation takes its toll. Here are three ways to reduce your exposure to inflation:

1. The Right Investments

Some investments can help you beat inflation. If inflation runs at an annual 3% and your annualized return is 6%, then you come out ahead. Your money is growing at a faster rate than inflation. Many people like dividend stocks, since the value of the stock itself, have the potential to grow while providing you with an income. But investing in dividend stocks is investing in individual companies and that carries risks.

Instead, consider low-cost index investing. When inflation hits, stocks go down too. But since companies will eventually raise prices eventually as they want to make a profit, stock valuations have tended to eventually make up for the profit decreases of companies initially hit with inflation. Commodities can provide an even better hedge against inflation, but the volatility of some of these investments will test your risk tolerance. You also have to remember that, unlike companies that earn a profit, commodities themselves don’t produce income. That means their prices are always governed by supply and demand so the timing of when you buy into a commodity may be more important than being invested in it.

If you are concerned about stocks and too jittery about commodities, you can opt for something considered less risky. TIPS are Treasury securities indexed to inflation. For individuals, the US treasury also lets you buy Series I Savings Bonds (I bonds). And unlike bonds you buy in the open market, these I bonds don’t ever lose their value below the price you bought them at. So, your capital can be protected, and you get a little extra without a great deal of risk. There are also tax advantages too. I bonds interests don’t incur state taxes, and the interests are taxed deferred until you withdraw. There’s a minimum holding period of one year, and you lose three months’ worth of interest if you withdraw within five years. It’s still a really good deal for individuals though.

Before you go out and move all your fixed income into these I bonds, I have to tell you that there’s a limit to how much you can buy each calendar year. As of writing, you can only buy $10,000 worth of I bonds per person electronically each year. There’s a way to increase that amount, but you are going to need to request your refund to be issued to you in paper I bonds for another $5,000 per year. For most, that’s more than enough. If I really want to stretch it, for example, I can buy $10,000 for each member of my family. That’s $40,000 each year not counting the $5,000 I can get through my tax return.

2. Be Smart About Debt

What about debt? Some will say that you should borrow as much as you can if there is runaway inflation because your debt won’t be nearly as costly in real terms if the price of everything goes up. Yet, paying down debt as fast as you can will help you deal with inflation much more easily since you will have more cash flow to deal with rising prices as your money isn’t being sucked into debt payments and interests. So pay off your credit cards while interest is a little lower, and put more towards the principal. If you instead let your debt pile up even more, you might have to choose between paying your debt or buying groceries one day!

While we are on this topic, now is also a good time to refinance, locking in lower rates. You can refinance your home and car loans to a lower rate, saving money each month so you have more to invest. If you have a variable rate, locking in can help you avoid interest rate inflation in the coming years. After all, rates are still close to historic lows.

3. Lifestyle Choices

The way you live your life can also reduce your exposure to inflation. I already gave you a glimpse of the things I’ve done through the years to blunt the impact of rising costs. A healthy lifestyle will also help. It’ll save you money now and will also result in slower increases to your health insurance premiums. While you can’t avoid insurance rate rises altogether and I understand not everyone is religious or feel comfortable using a healthcare sharing ministry, you can still prevent huge rate increases every year with better health habits.

If I were you, I would look to see if I can reduce my exposure to gas prices inflation by driving less. As you probably know, one of the biggest increases has been gas prices. Walk more, or ride your bike, and consolidate trips to help you spend less on gas. Now that bosses are talking about opening the office again, you should also see if there’s an option to telecommute two or three times a week. The past year has obviously proved that it can work. At the very least, see if flexible hours are possible. If you can avoid the commute and traffic, you can also avoid some of the gas price hikes.

Bottom Line

The Fed and Treasury department say this new wave of inflation is transitory. But you and I know that some increases are going to be permanent. After all, when have you ever seen a restaurant lower their prices once they decided to raise them? Inflation may be coming back in a big way. Be prepared.

What other ways can you reduce your exposure to inflation?

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  • Beau W says:

    I’m angry at all this inflation. It’s not good for anybody. I hope it doesn’t get too crazy. I like the idea of buying Treasury bonds to hedge off inflation. In my opinion you can’t get a better investment that’s safe as that. The I bond is getting 3.54% percent you can’t get that rate at any bank around.

    • David @ says:

      The ibonds really are a good deal. Too bad there’s a limit on how much you can buy, so it’s not something you can just jump into and replace all your bond allocation in a hurry.

      Still, those who are set on having a portion of their bonds in inflation-protected securities should definitely buy some now.

      • Beau W. says:

        Right now is s great time for buying Tips David. With the inflation adjustment coming up the interest rate is going to be really great. Personally I think the Fed should have acted sooner. But it seems like the Fed has a different way of doing things.

  • Terri says:

    I haven’t noticed a huge increase in grocery prices, but then again I usually try to keep a well-stocked pantry. I stock up on items when they are on sale rather than buy them week to week. What I have noticed, however, is some items are packaged in the same size boxes, jars, or cans but contain less. I consider it inflation since one must pay more per unit.

    • David @ says:

      The stealth price increase is so sneaky. I notice that with chips quite a bit at the grocery stores since many people may not notice.

      There was a bakery close by that also did this a few years ago. They either made their bread a bit smaller or a bit pricer every single time I went. It used to annoy me to no end until I said enough is enough and I never went back.

  • Steveark says:

    Last twelve months inflation has been 2.6%. That’s right on the normal average for the US. I haven’t seen any increases in hotels, VRBO, car prices or food (restaurants or groceries). Maybe it’s a regional thing. You are metro and I’m rural. Gas might seem higher but it was this price 13 years ago, so that’s zero inflation in over a decade in spite of environmental requirements that have made it much more expensive to produce. I think we’ll see inflation over the next 12 months but it’s been very moderate so far.

    • David @ says:

      I just realized one thing. I always thought that the government saying inflation to be transitory means that price will increase but it will dip back down. Now that I think about it, I think transitory actually means that the increase in percentage won’t stay high forever. What I mean is, I thought transitory means that if the last 12 months had 2.6% inflation, it would eventually have deflation for the prices to dip back down. It makes no sense now that I’m trying to explain it in numbers but I always mistakenly thought that way. Those increases are permanent! They just mean that the inflation won’t KEEP increasing year after year.

      That means the new restaurant prices are here to stay. Yikes!

  • EdG says:

    I’ve noticed restaurant prices going up to, but not quite 30%.
    Gift cards can help, I just bought some yesterday at Costco for a local chain brewery and saved 20%. Eating out is also an optional expense.
    But in general I think we’re in for long term increased prices for just about everything. As a retiree it’s a problem, especially since interest savings rates are not going up to meet inflation. Just be diligent about cutting where you can and getting discounts, and maybe not eat out as much. The gas prices hurt as I tow a mid sized trailer and we love to travel, I can only go slower, but I find 60 is my minimum.

    • David @ says:

      I now get a chuckle when banks advertise their savings accounts since they advertise rates like 0.40%. I mean, why bother?

      Gas is definitely an issue. The good news is that we are unlikely to see gas prices continue to increase too significantly because the Saudis and others will eventually start increasing their production if they see that prices can sustain their supply flood.

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