Tyler Lang, CFA, is Founder & CEO of Journey Advisory Group. Follow Tyler on LinkedIn.

Gas, milk, eggs, beef, housing and cars: Some Americans are spending over $300 more each month due to record levels of inflation. The rate of inflation in July was 8.5%—a near 40-year high. You feel it every day at the pumps and in the grocery aisles, and although wages are up a bit, the net result is that the buying power of your dollars is falling quickly, and many are feeling the sting in their wallets and in their quality of life.

Yes, you can clip coupons and cut back on nonessential spending, but what can you do to manage the viability of your overall financial situation to protect your future? In thinking about strategies to protect and strengthen our assets during times of inflation, it is useful to gain some perspective on the economic climate we find ourselves in.

What is inflation and how did we get here?

The general benchmark for measuring inflation is the consumer price index (CPI). The CPI tracks the changes in costs of eight major categories of consumer spending: food and beverages, housing, transportation, medical care, recreation, clothing, education and communication, and other goods and services. Prices for these items are impacted by the tried-and-true principles of supply and demand. Both supply and demand issues have played a part in our current economic landscape.

During the early part of the pandemic, which caused unprecedented economic disruptions across the globe, the demand for certain stay-at-home goods (think exercise equipment, home entertainment and kitchen appliances) spiked while Covid-19 lockdowns in China and elsewhere wreaked havoc on the supply chain. Additionally, the price of fuel, which affects practically all segments of the economy, skyrocketed as a result of international trade complications due to conflict in Europe. The question remains, how long will this discomfort last, and what should be done?

How do we control inflation?

Historically and theoretically, inflation can be quelled through a rise in interest rates by the Federal Reserve Bank, which typically will suppress spending. However, the danger of recession looms if the delicate balance between lower inflation and increased interest rates is not achieved. There are many who believe the economy has already entered a recession and this, in addition to the unprecedented repercussions of the pandemic, amounts to a very unpredictable economic forecast with many economists scratching their heads. The Fed generally aspires to hold inflation at 2%-3%. Even with the recent hikes in interest rates that were put in place to lower inflation, most economists agree that the economy will need to withstand many more months of high inflation in addition to higher interest rates before achieving these desirable levels.

So, what should we do?

Warren Buffet suggests that the best protection against inflation is your own earning power. In other words, he recommends adding to and enhancing the skills and talents that make you most valuable in the job market. Thanks, Warren, but what else can we do? Buffet further contends that the worst thing to do is hold cash, which loses value as prices increase. It’s important to examine your real rate of return, which takes into consideration the gains you receive, less the rate of inflation. Historically, the stock market has provided a buffer against inflation.

In this economic climate of high inflation plus rising interest rates, however, it is particularly vital that a flexible, agile and adaptive approach be taken to monitor your investments.

Conventional wisdom offers investment suggestions such as these during times of inflation:

• Looking at value rather than growth stocks.
• Considering capital-light companies.
• Researching companies with price-inelastic products; in other words, companies that can raise prices without harming the business.
• Checking out Treasury inflation-protected securities (TIPS), where the principle increases with inflation.
• Exploring real estate with low fixed rates over time.

Other points to keep in mind when interest rates are rising and the threat of recession pervades include:

• Try to pay down high-interest credit cards and take advantage of 0% interest rate promotions through credit card transfers.
• Investigate tax favorable investments and expenditures. The Inflation Reduction Act of 2022 may offer considerable tax credits for the purchase of clean appliances, electric vehicles and rooftop solar panels.
• Consider keeping a three-to-six-month reserve for emergencies.
• Diversity in your portfolio can be a good idea in times of uncertainty.
• Most importantly, take control of your money before its value decreases.

Your financial advisor can help suggest your own best defense against spiraling inflation and offer ways to diversify your holdings to protect and grow your money.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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