Quick Guide to Inflation + How to Protect Your Assets

Inflation is the increase in prices of goods and services across the board. Although it often has a negative connotation, a little inflation is integral to a healthy economy. Rising prices can mean higher revenue and earnings for businesses—if they can raise prices to keep up with their costs.

A healthy level of inflation can also be good for investors. And for workers, inflation is tied to higher wages, which go right into your pocket!

But when prices go up too fast or unexpectedly, it can throw a wrench in the works. So how can you protect yourself and your investments against inflation? Check out our top tips below.

What Causes Inflation?

While the key factors influencing inflation are production costs, demand, and fiscal policy, much of it comes down to supply and demand. The three most common trends that can cause inflation include:

  • Demand-Pull: When consumer demand is higher than the availability of a product or service, it pulls prices higher as consumers are willing to pay more.
  • Cost-Push: This occurs when supply constraints or an increase in the cost of production pushes prices higher for consumers. For example, one (of several) reasons airfare is so expensive currently is the rising cost of jet fuel—oil was about $65 a barrel in 2021 but has reached over $100 in the past year.
  • Wage-Price Spiral: When people assume inflation is here to stay and start asking for wage increases and stocking up on goods before prices can go up even further, companies may pass the costs on to consumers, resulting in a wage-price spiral.

How Can I Defend Myself Against Inflation?

You can insulate yourself against inflation by making modest money decisions. When inflation spikes, it’s time to:

  • Lower your utility bills and monthly expenses. From electricity to hot water to countless streaming services, where can you cut back? You can likely eliminate some services or renegotiate your cable, internet, or cell phone bills.
  • Reduce your grocery bill. Avoid food significantly affected by inflation, like pork, cheese, and baked goods.
  • Cut back on nonessential spending. Yep, that means online shopping, entertainment, and dining out. You can also shop smart by purchasing generic brands, using coupons, and signing up for loyalty programs.
  • Spend less on gas. In other words, travel less. Opt for a staycation or simply cut back on going out (which saves money on multiple fronts).
  • Travel on a budget. If you do get the travel itch, do so affordably. Plan a weekend getaway within driving distance and stick to cheap or free activities like outdoor recreation.
  • Find ways to bring in more money. It doesn’t have to be a second job! Consider banks and credit unions that offer high-yield savings accounts, ask for a raise (if appropriate), or resell gently used clothes and items.
  • Check on your emergency fund. While you shouldn’t have too much in cash assets (more on this below), you should have enough to cover three to six months’ worth of expenses. Assess your regular costs to ensure your emergency fund is sufficient.

How Can I Protect My Investments from Inflation?

The key is investing in a balanced portfolio of stocks, bonds, and cash that complements real assets like real estate. This entails a wise asset allocation and security selection strategy based on your long-term goals.

Stocks are the best defense against inflation over the long term despite their higher risk and short-term volatility. They can offer the highest growth even during extreme inflation. Commodities like energy, metals, and agricultural products typically do well as these businesses increase prices in inflationary environments.

Cash is the weakest way to defend against inflation, especially during low interest-rate environments. Although taking your money out of the market and holding onto it may be tempting, doing so could significantly impact your long-term returns. Cash assets have low returns versus stocks and bonds over the long term. Investors who choose their stocks wisely can keep up with and possibly even pass inflation rates.

Learn why it’s essential to know your time horizon and stay in the stock market.

Be Proactive in the Face of Inflation

It’s easy to panic when costs skyrocket, and the market becomes volatile. However, you can protect yourself from inflation with a solid financial plan that includes a diversified portfolio and a healthy budget.

Of course, this will vary based on your goals, assets, and stage of life. And economic turmoil can lead to many questions. For tailored financial advice and a comforting ear, let’s chat! Carlson’s wealth advisors will be happy to support you during uncertain times.

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