Beating Inflation: Lessons From History

Beating Inflation: Lessons From History
People walk by the New York Stock Exchange (NYSE) in New York City on May 12, 2022.(Spencer Platt/Getty Images)
Anne Johnson

The United States has gone through several inflationary periods. Two memorable ones occurred around WWI and WWII. But today, most people remember the 1970s and early 1980s when inflation was out of control. Unfortunately, in 2022, inflation is again climbing with no end in sight.

Currently, inflation sits at 9.1 percent. And people are scrambling to deal with it. So, what lessons have we learned from past inflationary times? And how can we apply them to 2022?

Inflation Devalues the Dollar

Inflation erodes the dollar’s value. When the overall prices of goods and services increase, inflation takes hold. That makes each dollar you earn or save worth less and less.

The U.S. government tracks inflation through the Consumer Price Index (CPI). The CPI measures inflation by how much it costs for a theoretical “basket of goods”. The higher the cost for those goods, the higher inflation is.

Inflation creates a vicious cycle. Workers demand wage increases. To accommodate this, businesses raise prices, which leads to demands for more wage increases: and the cycle continues.

In Times of Inflation, Saving May Cost You

Many economic analysts point out that the practice of saving is not prevalent in the United States. But during inflationary times, it has been questioned whether saving money is even wise.

If you store cash in your safe right now, you will automatically lose 9.1 percent due to inflation. So, in theory, that $1,000 you stashed away is now only worth $909.

Using a financial institution’s savings account also costs you money. As of July 2022, the interest rate on Chase Bank’s savings account was 0.01 percent. That’s on the low side. But even “high yield” savings accounts from financial institutions like Discover Online Bank, Lending Club and Alliant Credit Union, with five percent interest rates, still have rates below the inflationary rate. Although these rates are widespread between them, the actual average rate for savings in the United States based on the FDIC is 0.10 percent.

Keeping a small amount of savings is essential for a short-term rainy-day fund, but during inflationary times, it has been noted that you’ll lose money if your entire nest egg is sitting in the bank or credit union.

Although it’s not wise to spend everything, sometimes you should take your excess cash and make big purchases sooner than later. This is especially true if you expect inflation to climb further. The product’s price will just go up in the future, and your dollar will be worth less.

Invest to Stay Ahead

Instead of stashing your excess money in a savings account, consider investing. How you invest depends on your age and goals. Always speak to a financial advisor before investing.
Many think investing in the stock market is a wise way to stay ahead of inflation. For instance, if inflation increases the cost of a company’s product each year, it will likely technically increase the value of the company. Buying stock and holding it in this company may hedge your bet against inflation. This is a long-term proposition.

Precious Metals for the Long-Term

Traditionally, precious metals like gold and silver have been thought to hedge against inflation. It keeps up with inflation to a point, but history has taught us that this is not always the case. Sometimes it does not move with inflation.
For instance, look at what happened in the 1980s. Gold lost 8.3 percent of its value per year, while the average inflation rate was 7.5 percent per year.
Gold still has its place and can usually keep pace with inflation. But you may not want to put your entire savings into it.

Fixed Debt Is Positive

Many have found that previous debt isn’t necessarily a negative during high inflation. Owning a home with a fixed-rate mortgage could actually put you in a better position than being a renter. Rent tends to go up yearly, but a mortgage with a fixed rate won’t.

Everyone budgets a certain percentage of their salary for housing. As wages increase, the percentage of your salary earmarked for housing decreases because a mortgage remains the same.

For instance, if you take home $5,000 monthly and your mortgage is $2,000 monthly pre-inflation, the percentage of your income going to housing is 40 percent. But when an increase of 10 percent in your salary raises it to $5,500, your percentage toward housing is now roughly 36 percent. The lower percentage allows you to use more of your dollars to invest or purchase goods.

If you have a variable interest rate, this doesn’t apply. A variable interest rate will probably increase your housing costs.

Real Estate Performs During Inflation

Housing is always needed. And in the past, investing in real estate has made sense during inflationary times. Because inflation tends to drive up interest rates, more people are renting instead of buying.  There is increased potential to invest in multi family housing.
When inflation is high, there is a downside of owning real estate if you need to cash out quickly. You may not receive the price you want; if you can even sell your property. Ask your financial advisor if real estate is a good component of your portfolio.

TIPS a Good Mix to Portfolio

Treasury inflation-protected securities (TIPS) are treasury bonds that are indexed to inflation. Designed for the long run, they can protect your purchasing power.  They can be a wise investment when inflation is high.

Keep in mind that the interest payment does go up and down since the principal is adjusted based on the CPI. For instance, if there is inflation, the principal will increase, but if there is deflation the principal will decrease.

The maturity terms for TIPS are five years, 10 years and 30 years. Overall, they are a stable investment. They have a low market risk and low inflation risk.

Financial Lessons for Inflationary Times

Avoid saving money that’s not earning enough to keep up with inflation. Don’t spend all of it but consider making those big purchases without going into debt. Of course, there’s always the option of investing your excess dollars. However, remember that gold and silver may not always be the best bet for fighting inflation.

Be aware of what has worked and what hasn’t in the past. Then, take a proactive approach to inflation by meeting with a financial advisor and planning a strategy.

The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
Anne Johnson was a commercial property & casualty insurance agent for nine years. She was also licensed in health and life insurance. Anne went on to own an advertising agency where she worked with businesses. She has been writing about personal finance for ten years.