Tim Moore
May 12, 2021

Have you noticed that you are paying more for things than you did a year or two ago?

I went to the grocery store last week for the first time in…..awhile. I’ll admit it, my wife usually does the grocery shopping at our house and I’m clueless about the prices of things. But I had a small list of items to get, and I noticed that things were more expensive than the last time I had stopped by to pick up a few things. Milk, cheese, meat, you name it, I was paying more.

And it’s not just food prices. Most of us are aware of fuel prices on their way back up to an 8-year high. Let’s not even get started on lumber prices. Now, some of these things are pandemic-related of course. The supply chain was severely and unprecedentedly interrupted when factories were shut down and workers were furloughed or laid off. U.S. demand for fuel plummeted because everyone was staying at home.

But with the economy for the most part re-opened, we’re now seeing signs that real inflation is here for the first time in a generation. And it’s obvious why.

Why Is There Inflation?

Inflation is the natural, gradual increase in the price of goods and services over a period of time in an economy. Inflation in general isn’t a concern, we only get concerned when we have hyper-inflation (periods of sharp price increases that outpaces the economic growth of a country) or periods of flat or deflationary environments (a contraction in the supply of money and credit in the economy). Healthy, managed inflation is normal for a capitalist monetary system.

But what we are starting to see the early signs of is a situation where the value of all of our dollars are going down relative to their purchasing power just 12 months ago. What could cause that? Well, primarily an expansionary monetary policy that has increased the net worth of most American households through stimulus and expanded unemployment benefits. The Federal Reserve has taken dramatic steps to try and prevent a recession by the daily purchase of tremendous amounts of equities and business debt. And now you have rampant government spending program on new initiatives like infrastructure and local government aide. The consequence of this is 35% of all the money afloat in the system today was printed since the pandemic began!

I’m not making an argument for or against those policies. They started with President Trump and have expanded with President Biden. This is an examination of the effects of those policies, and an expansionary Federal Reserve. In fact, a report came out today that the Consumer Price Index rose 4.2% from a year ago, exceeding expectations by 17%.

The best way to defeat inflation is not to try and control it (you can’t), but to plan for it and invest in things that will help you beat it!

Why We Invest in the Stock Market & Real Estate

Simply put, the best tool for combatting inflation and the eventual decline in purchasing power of your dollars today is to invest into stocks of good growth companies, and to invest in real estate. Some people see commercials for investing in gold (they were really popular around the 2008 recession) and think that is their best hedge against inflation. Not really. Gold is not suitable for most investor’s long term portfolio.

Investments in good companies with a good track record and balance sheet will help you fight inflation. Why? Because the value of their shares in 20-30 years will likely keep pace if not outright beat the rate of inflation. Their value will likely be worth much more in the future, in whatever dollar amount is fair market for that period of time in the future. So you are putting today’s dollars to work for a much higher potential future value after periods of inflation have taken effect.

Real Estate is another good inflation hedge. Just think about the stories you heard from your parents or your grandparents. While 2 or 3 generations ago, they could purchase a nice suburban home for $20,000 – $40,000, today those homes would likely be worth $200,000 – $300,000 depending on the market. That’s a nice inflation hedge. So thinking about your primary home first is a great place to start, because you are controlling those costs. If you have (and you should have) a fixed-rate mortgage, your monthly payments will remain relatively unchanged for the period of your loan. Meanwhile, over that 15-30 years, the value of your home will likely increase as inflation and other factors play in. So in the final year of your mortgage you will likely be paying much less relative to what other folks who just purchased a comparable home will be paying. Think about the fact that if you purchase a $300,000 home today, it very well be worth more than $1,000,000 in 30 years. Would you rather buy at today’s prices and realize that capital appreciation, or save for 30 years and buy it at the inflated price? That’s taking control of your purchasing power. Get a little farther along in your investment journey, and income-producing real estate is another wonderful tool to combat inflation.

The bottom line is you must be invested to combat inflation. Otherwise your savings, money market, or even CD accounts will be wasting away in their purchasing power over the course of your lifetime. Talk to an investment advisor today to see if how you are currently invested has you properly protected against inflation risk!

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As an Investment Advisor with Core Planning, LLC, I work with families and individuals both young and old to achieve their short and long term financial goals. As fiduciaries, our approach puts you, our client, always 100% first. I’d love to start an initial conversation with you and share more about what our firm can offer you!