How to Protect Against Inflation on Your Financial Freedom Journey

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We’ve all heard at least one corny joke about rising inflation: “Inflation has turned the Dollar Tree into the Dollar Twenty-Five Tree.” “Gas prices are higher than Snoop Dogg.” “Inflation is out of control, but that’s just my 3 cents.” 

These jokes are awful. But as Sheldon Cooper from The Big Bang Theory would say, “It’s funny because it’s true.” 

The Dollar Tree now sells most items for $1.25. And gas prices are climbing higher.

But as investors, how do we protect ourselves against inflation? In this guide, I’ll share some ways to battle rising prices while protecting your financial assets. 

What Is Inflation?

For those who aren’t familiar with inflation, let’s talk about it for a minute. Inflation is when the price of something steadily increases and your purchasing power decreases. 

Or, as my mother would say, it’s when groceries get expensive again. 

There are several types of inflation, including:

  • Demand-pull inflation: caused by demand outpacing supply
  • Built-in inflation: caused by demand for higher wages
  • Cost-push inflation: caused by increased prices for goods when there’s no alternative
  • Hyperinflation: caused by out-of-control inflation; prices rise more than 50% per month

Inflation is tracked by the Consumer Price Index, or CPI. The Consumer Price Index monitors the prices of goods and services. 

Typically, you’ll see a month’s CPI reading measured against the CPI reading for the same month in the prior year. So the reading of 8% inflation in February 2022 meant that prices in the CPI were 8% higher that month than they were in February 2021.

Although a little bit of inflation is a good thing because it indicates a healthy economy, inflation gone wild is bad. That’s because it means your hard-earned dollars don’t go as far as they did. That can erode your investing gains.

Typically, inflation increases about 2% per year. But recently, that rate has more than quadrupled. 

The CPI shows that, in March 2022, inflation rose 8.5% year over year. That’s the largest one-year rise since the 1980s.

What Caused Our Current High Inflation?

In the current case, the high inflationary rate was caused by a series of events triggered by COVID.

As early as 2019, factories in Asia shut down due to skyrocketing COVID case counts. That caused a tighter supply of components and goods — especially in the technology industry.

But then COVID hit the rest of the world and drove demand for components and goods way up! For example, people stuck at home drove up demand for new TVs, laptops, and video game consoles to help them work remotely and keep from going stir crazy.

That supply/demand imbalance helped prices increase, tripping off inflation.

Of course, there are several other factors that have helped spur on inflation, too. Bad weather and poor harvests, labor shortages, and the geopolitical crisis in Ukraine have all played a role in our current high prices.

How Long Will Inflation Continue to Rise?

There’s no way to know for certain how long inflation rates will continue to rise.

The U.S. central bank — the Federal Reserve — has stepped in and started raising interest rates in an effort to quell higher inflation. But some critics think their efforts have been too little, too late.

Many economists now expect the current high inflationary period to last at least into 2023.

Investments to Protect Against Inflation

There are several ways smart investors can not only protect against inflation but also profit at the same time.

Let’s review a few asset classes that have a history of performing well during inflationary times.

Gold

Many longtime investors will tell you that gold is the best hedge against inflation. That may not be exactly the case. 

However, gold tends to hold its value, no matter what’s going on in the stock market. That’s because it’s a real asset — you can hold a bar of gold in your hand (although it’s heavy!).

There are several ways to own gold. You can buy actual items made from the precious metal and bury coins in the backyard a la your crazy uncle.

But you can also invest in gold through exchange-traded funds (ETFs) such as the SPDR Gold Shares ETF. You can also buy gold mining stocks.

TIPS

“TIPS” stands for “Treasury inflation-protected securities.” These are U.S. Treasury bonds designed specifically to protect investors against inflation.

That’s because the principal of each TIPS increases with inflation as measured by the CPI. The higher the inflationary rate, the more you’ll get paid when the TIPS makes its semi annual payout.

Real Estate

Historically, real estate has been a great hedge against inflation. That’s because, as the inflationary rate rises, so do property values.

If you’re a landlord, it means you can charge more for rent. And if you’re looking to sell a property for profit, you can usually charge more for it.

However, keep in mind that real estate transactions themselves can be costly — there are plenty of fees you’ll have to pay. That said, if you’ve done the math and it works out in your favor, real estate can be a rewarding investment in many ways.

What About Investing in Stocks?

Although some investors avoid stocks during periods of high inflation, that’s not necessarily a wise move. Some kinds of stocks actually do quite well in inflationary times. 

Now, one type of stock to avoid during inflation is growth stocks. These are stocks whose valuations are based more on a company’s promise, rather than its actual fundamentals. 

Many tech stocks can be considered growth stocks, because you’re investing in the technologies they’re developing. (This is why Tesla is currently the most valuable car maker, instead of Ford or Toyota.)

In addition, companies that sell items or services consumers don’t need — known as consumer discretionary businesses — are a bad inflationary pick. That’s because, as households reorganize their budgets around higher costs for necessities like food and energy, they’re less likely to buy stuff just for fun.

That means those companies that supply necessary products like food and energy are good picks for high inflation. 

When looking for stocks to invest in during periods of high inflation, look for stuff people just can’t live without — food, gas, medicine, bandages, baby supplies, etc. The stocks of the companies that sell these products have historically done well during inflationary times.

But what if you already own stocks? What should you do when inflation makes the markets volatile?

Learn More:

Managing Market Volatility

The stock market goes up. The stock market goes down. But sometimes its mood swings are more dramatic than usual, resulting in market volatility.

Common reasons for market volatility can include company scandals, negative news about a business, leadership changes, and acquisitions.

But inflation can cause market volatility as well. As companies grapple with higher costs for materials and labor, they may report weaker profits. That can cause their stocks to plummet.

Market volatility can tug at our emotions. It’s easy to get freaked out and bail on a stock when you’ve lost 50% or more of your investment. 

But many experts say that individual investors should buy and hold through volatile, inflationary periods. In the long run, well-chosen stocks will pay out.

How Can You Fight the Effects of Inflation in Your Daily Life?

Along your path to financial freedom, one way to beat inflation is to live within your means. That means:

  • Getting out of debt
  • Lowering big costs (transportation, food, housing, etc.)
  • Living frugally
  • Tracking expenses and/or budgeting

Some of my other favorite ways to combat inflation are:

  • Comparison shopping (when applicable)
  • Meal planning and prepping
  • Buying in bulk as it makes sense for your situation 

Protecting ourselves against inflation is important during and after reaching financial freedom. 

Financial freedom can allow us to live how we want to live. But inflation can cause unintended increases in expenses. By combating inflation, we can save more — and even profit — during our financial journey. With more, we can spend, give, and enjoy our money as we see fit.