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How to Protect Yourself from Inflation

| November 10, 2021
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Inflation continues to be a concern for many Americans as the year-over-year inflation rate has increased to over 5% for several months this year. The primary causes of inflation are believed to be the dysfunctional labor market and supply chain disruptions, which do not mean much to consumers who are having to stretch their budget to buy the goods and services that they need each month. Fortunately, there are things that consumers can do to protect themselves from the impact of inflation.

First, there are ways that consumers can reduce their personal inflation rate by converting some of their monthly expenses to fixed costs. For example, a fixed rate mortgage does not increase with the rate of inflation whereas rents often do. So, owning a home can be a way to reduce the impact that inflation may have on housing costs.

Second, it can pay to look for substitute goods where available. With the supply chain disruptions there have been many situations where the price of one item has increased due to limited supply, while similar items were not impacted, or at least not impacted to the same extent. For example, some auto makers were more negatively impacted by supply chain disruptions causing the price of certain makes or models to increase. Meanwhile, other manufacturers did a better job of managing their supply chain so their makes and models were not in as short supply and therefore the prices were not as elevated. For many consumers one type of car may be a substitute for another so selecting the lower cost options may be a way to offset the negative impacts of inflation on auto prices. This strategy may also be effective when it comes to other types of goods as well.

Third, seek ways to change behaviors that will save money and avoid the impact of rising prices. For example, fuel  prices  have increased  sharply  in  recent months. While there are few substitutes for gasoline, there are many ways to drive less and therefore reduce the total monthly cost of auto fuel. One option is to carpool to work or use public transportation. Another option is to limit the trips to do errands on the weekends or after work. Rather than take multiple trips, plan one longer trip to limit the miles driven and the related fuel cost. If the household has more than one vehicle it may also be beneficial to use the more fuel-efficient vehicle for longer trips to gain the benefit from the fuel efficiency and reduce gasoline costs.

Fourth, put off purchases until the items are actually needed. Inflation is typically caused by consumers buying earlier than they otherwise would have because they are concerned that prices will be higher in the future. This pulls future demand forward into the current period causing a surge in demand, whereas the goods and services in the market are limited causing prices to increase. The way to counteract this trend is not to perpetuate it by joining in the buying frenzy, but rather deferring purchases as long as possible so that few goods or services must be purchased when prices are high but incomes have not yet caught up. This may be done by maintaining items so that they last longer. For example, making sure a vehicle is serviced regularly, engaging in regular home maintenance so items do not need to be replaced, or waiting to replace goods when they have worn out rather than when they are dated or out of style.

These small steps may not be able to completely offset the impact of inflation but added together they can reduce a consumer’s personal inflation rate to a level that is closer to the long-term 2-3% annual rate rather than the current 5% annual level.  

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