Inflation Defined, Current and Forecasted Rates
Simply put, inflation measures how much more expensive a set of goods and services has become over a certain period, typically 12 months. It can measure all goods and services in an economy, or be specific to a certain set of goods and services, such as gasoline or produce.
Through May of 2022, according to the Bureau of Labor Statistics, inflation rates have ranged from 7.5 to 8.5%. Forecasts point to the possibility that inflation rates have peaked, but rates are likely to remain above the Fed's 2% target for quite some time, negatively impacting the purchase power of the average consumer.
What We Can Do to Stay Ahead of Inflation
So what does all of this mean to each of us? Let’s start with lifestyle changes, some easy and some a little more difficult, that can potentially make a sizeable difference in our ability to stay ahead of inflation. The main thing is to make changes that can make the most impact for yourself and your household.
- Decrease, or change the timing of, spending on non-essential products and services.
- Assess your transportation habits. Can you reduce your driving time given the exponential increase in fuel costs.
- Have you tried to get an increase in pay at your current job? Or is it time to look around at jobs that might compensate better for your experience and expertise?
Beyond these “non-investment” adjustments, there are also saving and investment vehicles that can be leveraged to combat high inflation and keep us on track.
It’s important to know that high inflation over a sustained period of time can also mean higher interest rates on certain investments.
Periods of high inflation may be a good time to borrow, as borrowing at a fixed rate could result in repaying the debt more cheaply in the future.
Following are some saving and investing vehicles that may help you mitigate the impact of inflation.
Series I Savings Bonds, or I bonds, are long-term investments with a reliable return.
I bonds are low-risk investments backed by the U.S. government. The value of I bonds doesn’t go down and they offer tax benefits. Due to current high inflation, I bonds are now paying over 9% in annual percentage yield1.
For more information about I Bonds, visit the IRS website at https://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm
Treasury Inflation-Protected Securities, or TIPS, can protect your government bonds investments if you expect inflation to accelerate. These bonds are indexed to inflation, so if inflation moves up, the effective interest rate paid on TIPS will too. Also keep in mind the same holds true if inflation decreases.
TIPS bonds pay interest every six months and are issued in maturities of five, 10 and 30 years. They’re also backed by the U.S. federal government.
To learn more about TIPs, visit the IRS website at https://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm
During turbulent economic periods, gold is often viewed as a store of value by investors.
In periods of high inflation, gold can be considered as a hedge against inflation —increasing in value as the purchasing power of the dollar declines. However, government bonds are more secure and have also been shown to pay higher rates when inflation rises, and Treasury TIPS provide inflation protection built-in.
Making the Appropriate Adjustments for High Inflation
As we all deal with an economic phenomenon not experienced in several years, there are some simple pivots that can make a real difference in our financial health.
Perhaps the most important thing you can do is diversify your portfolio to keep up or even outpace the inflation rate. Make sure to seek counsel from your financial advisor for specific strategies to optimize your financial health, especially during these volatile times.
1 Rate as of 07/07/2022
I Bonds, TIPS, and Gold are not FDIC insured.