The Best Personal Finance Inflation Hedges
Inflation was already a stone’s throw from 8% before war broke out between two countries that account for a significant share of the world’s energy and agricultural commodities.
I wouldn’t be shocked to see this number rise to 10% in the coming months.
Working in an industry that is obsessed with markets, I find most of the questions people have about inflation right now come from the perspective of their portfolio.
Should I buy raw materials?
What about TIPS?
Is it too late to buy energy stocks?
Have you seen the yields on Series I Savings Bonds? !
How to hedge against inflation?
In my view, the time to prepare for inflation is in advance, not while it is happening.
From 2009 to 2020, the US stock market has grown more than 13% per year above the rate of inflation. If you’ve been a long-term investor, you were protecting yourself against high inflation before it even got here.
Regardless of how you manage your investments to account for higher prices, there are other ways to hedge inflation beyond your portfolio.
Here are some ideas for the best personal finance inflation hedges:
A Costco Membership. Are prices going up at Costco like at other grocery stores? Sure. But buying in bulk is a good way to hedge against further price increases should they occur.1
Your Costco membership also comes with slightly lower gas prices, which at least pays for your annual membership and more.
Plus, you can still get a Costco hot dog and a soda for $1.50, the same price as 1985 (I’m only half kidding here).
A 30-year fixed rate mortgage. The only reason to invest in the first place is to improve your standard of living. If you just buried all your money in your garden, it will eventually lose value over time:
You can think of debt the opposite way. With debt, your liability is what loses value over time and that’s a good thing. That’s what makes a low-interest mortgage one of the best inflation hedges on the planet.
The median sale price of an existing home in the United States is now around $350,000. Assuming a 10% down payment, using the average 30-year mortgage rate of 3.7% over the last 5 years, you would get a monthly payment of approximately $1,450.
With 8% inflation over the past year, that would mean someone’s $1,450/month payment last year would now technically be worth more like $1,335. I haven’t calculated the after-tax cost of mortgage debt here, but you get the idea.
The combination of rising house prices and low mortgage rates has made housing the best hedge against inflation for the vast majority of Americans over the past two years.
Maintaining fixed rate debt also means that you are not subject to inflationary pressures on rents.
Unfortunately, if you don’t own a house, you take it on the chin. According to Apartment List, year-over-year rent growth was nearly 18% at the last reading.
The ability to substitute. Last week I found myself in one of the happiest places in the world on a Friday afternoon – the liquor store.2 I like to do my channel checks on trips like this, so I asked the owner how inflation is impacting his business.
He told me he was seeing higher prices across the board, but the thing that surprised him the most was a new gas surcharge on his ice cream delivery. He said they charged him $60 for a $30 ice cream delivery.
I suspect we’ll see a lot more of that in the weeks and months to come. Uber just announced that they are adding a $0.45 to $0.55 fee per trip while Uber Eats deliveries will include a $0.35 to $0.45 surcharge.
I know we’ve all gotten used to paying for convenience, but with higher prices, some people will have to make different choices about how to split their budget.
Maybe that extra $20 for DoorDash isn’t worth it anymore. Maybe you pick up the pizza instead of paying for delivery. Maybe sacrifice 1-2 nights of dining out to offset higher utility bills.
For people on a tight budget, there will probably have to be compromises.
Avoid lifestyle creep. Inflation tends to hit households at the bottom of the income scale because they don’t have as much room in their budget when the prices of basic necessities rise.
But the group that is easiest to profit from with higher prices is the one with higher incomes.
Last month, I wrote that Chanel increased the price of its handbags from $5,200 in 2019 to $8,200 today. These bags are signal items that the wealthy are willing to pay for.
Avoiding the siren song of luxury goods is a simple way to keep your personal inflation rate from spiraling out of control.
The ability to negotiate higher salaries. This option isn’t talked about enough in personal finance circles, but it’s probably the best environment ever created for workers to ask for a raise.
There are job opportunities aplenty, there is a shortage of workers and we are still in a world of pent up demand from the pandemic. If you offer real value to your employer, now is the time to ask for more money.
And if they don’t appreciate your work, there are plenty of options these days elsewhere. A recent study by Pew Research surveyed people who left their jobs in 2021. Most were looking for more pay or flexibility (the ability to work from home is another decent hedge against rising energy prices):
At least half of these workers say that compared to their last job, they now earn more money (56%), have more opportunities for advancement (53%), find it easier to balance work and family responsibilities (53%) and have more flexibility to choose when they work their hours (50%).
Saving money is always helpful, but when prices rise it becomes much more difficult for many households to save money.
Earning more money is one of those things that no one teaches you how to do, but it’s probably your best bet for improving your standard of living in the long run.
I know putting inflation hedges on your portfolio is the sexiest option, but you have more control over your personal finances than the markets when it comes to fighting inflation.
Why housing is a good hedge against inflation
1That’s when that extra freezer in the garage comes in handy.
2So much excitement in the air about plans for the weekend.