You Can’t Ignore Inflation Any Longer: Here’s How to Beat It

Inflation is getting harder to ignore. What monetary authorities have been dismissing for months as nothing more than the economic equivalent of a passing rain shower is starting to feel like a soaker. In August, the head of the U.S. central bank, Jerome Powell, said, in effect, “Move along folks, nothing to see here.” Even late last month the Federal Reserve’s powerful rate-setting panel attributed inflation to “largely transitory factors,” predicting that it would soon “moderately” exceed its 2% target. But the duration and the degree of inflation say otherwise. So why is this really happening and why now? It’s high time to focus on why the value of your money is declining and what you can do about it.

Consider working with a financial advisor to help you make your investment portfolio as inflation-proof as possible.

What Inflation Looks Like Now

You don’t have to be an economist to know that things cost more. Think about the last time you filled up your gas tank or went grocery shopping. For the 12 months ended September 2021, the widely followed consumer price index was up 5.4%, according to the Bureau of Labor Statistics. Not only is that more than double the Federal Reserve’s 2% annual target, but 5.4% masks far higher increases over the one-year time period: The cost of children’s footwear has climbed 11.9%, beef now cost 17.6% more than it did a year ago, prices for used cars and trucks have jumped 24.1% and gasoline has soared 42.1%.

Likewise, the Bureau of Economic Analysis (BEA) said recently that between August 2020 and August 2021, the personal consumption expenditures price index grew by 4.3%, well above the Federal Reserve’s 2% annual target. Furthermore, the BEA also said Oct. 1 that spending for goods in August 2021 was 20% above the February 2020 level.

Inflation today is not the result of a few soaring outliers pulling up the overall averages, according to Fed economist Fernando M. Martin. And the head of the St. Louis Fed says that even ignoring food and energy price hikes, personal consumption expenditures are up 3.6% in the U.S. – “the highest we’ve seen in 30 years.”

Concerns Are Growing

One-hundred dollar bill burning
One-hundred dollar bill burning

These kinds of numbers strain the move-along-folks narrative, and in fact that narrative is changing. On Oct. 7 the Federal Reserve Bank of St. Louis published a report warning that current inflation may last longer than anticipated. “Overall, even though higher inflation may be transitory, the transition may last longer than expected,” the St. Louis Fed report stated. “The risk is that the response of households, market participants and policymakers to a prolonged period of high inflation may itself sow the seeds of more persistent higher inflation.”

Private analysts also warn that inflation should be taken more seriously.

“Even if transient, higher inflation has already decreased living standards, and further damage is anticipated as just 18% of all households anticipated income gains would be larger than the expected inflation rate,” according to a study from the University of Michigan.

What’s Driving Inflation?

Several forces have converged to drive up inflation.

One is demand. Easing Covid-19 restrictions are releasing a great deal of demand that has been pent up since March 2020. A big part of the jump in demand stems from Congress providing cumulative budget support totaling 25% of GDP for 2020 and 2021. Add to that the Fed’s zero-interest-rate policy and you have what is sometimes called demand-pull inflation.

Another factor is supply. The jump in demand is being met with supply disruptions, partly because of the inability of transportation companies to find workers. In other words, demand is exceeding supply, something Econ 101 teaches means higher prices. Those higher prices, sometimes categorized as cost-push inflation, are particularly evident in energy (gasoline, heating oil), food and housing.

Then there is the massive boost by the Fed in the amount of money sloshing around the financial system. Along with other major global central banks, the Fed sharply increased the money supply to counter the Covid-19 recession. Normally the Federal Reserve expands the money supply, which includes outstanding currency and liquid assets. From 2015 until March 2020 it expanded the money supply between 3% and 5% each month. But in March 2020 it began expanding the money supply approximately 20% each month, a rate of expansion it maintained until March 2021, at which point it started trimming those increases. By August 2020 the Fed expanded the money supply by 9.24% – still well above normal levels. The Fed’s Martin is warning that if the M2 money supply continues growing at its current pace and future deficits are persistently large, “it would pressure the inflation rate upward.”

Likewise, economist Desmond Lachman, former deputy director of the International Monetary Fund, who attributes soaring real estate values to the ballooning money supply: “Fueled by the extraordinarily easy Fed monetary policy, at the national level U.S. housing prices are increasing by some 18% – or at a faster rate than they did in 2006.”

What to Do About It

Wheat farmer's combine at work
Wheat farmer’s combine at work

There are a number of steps investors can take to protect their portfolios against inflation. Which one or ones various investors pick will vary. Consider working with a financial advisor to select the hedges that best fit your goals, timeline and risk profile. Meanwhile, here are three of the best inflation hedges.

Commodities. One of the most effective hedges against inflation is investing in raw materials or agricultural products that can be traded. Common examples of commodities are goldoil, grain, natural gas, beef and coffee. Citing historical data, Vanguard research suggests commodities rise between 7% and 9% for every 1% of unexpected inflation, making them more effective than Treasury Inflation-Protected Securities and more reliable than equities.

Consumer staples. Unlike what are called consumer discretionaries, consumer staples are deemed essential. They include like milk and bread, toilet paper, medicine and utilities. Generally these kinds of securities offer steady if not outstanding capital gains plus reliable dividends, all with low volatility.

Real estate. The easiest way to invest in real estate is through real estate investment trusts (REITs). As measured by the MSCI U.S. REIT index, these securities have boasted higher annual returns than the S&P 500 since 2010. Just be aware that REITs are sensitive to interest rate changes. Since interest rate fluctuations can significantly alter the value of mortgages on the resale market, REITs are particularly vulnerable to those changes in a way that typical stocks are not.

Bottom Line

A number of factors are combining to extend the inflation currently afflicting the economy. These are demand, supply and the volume of money in the system. Taken together these forces make it unlikely that the word “transitory” accurately describes the problem. The good news is that investors have a number of options for positioning their securities to hold up against the declining value of the dollar.

Tips on Investing

  • A financial advisor can give you an objective assessment of how well prepared your portfolio is to handle inflation. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • SmartAsset’s free inflation calculator can give you a good estimate of the buying power of a dollar over time in the United States.

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