If there’s something that’s making everyone run currently, it has to be inflation. Central banks are raising interest rates to curb the spike in prices of goods while individuals are panicking as the anticipation for more challenging economic times increases.
With everyone worried because of the uncertainty that comes with hard economic times, how should we behave to cushion ourselves from the sharp spike in prices of goods and services?
Inflation Hits The Poor Hardest
As the prices of essential goods and services rise sharply, the poor are the most affected. These are people in the low-income bracket. With only a small disposable income, the increase in prices of goods and services means they can only afford less of what they used to before.
If they could afford to cater for three meals a day, with a sharp rise in prices of essential goods like flour and cooking oil, this would mean they can no longer afford three meals a day and have to settle with only two meals a day.
Inflation reduces your purchasing power.
Secondly, inflation hits hard on people with low saving rates and those not invested in assets that tend to do well during periods of high inflation. And these are the poor people. A low income often corresponds to a low savings rate and an inability to purchase assets like Real Estate and Equities that tend to do well during times of high inflation. As Nick Maggiulli wrote,
“What makes this result even worse is that the poor tend to not own any income producing assets either.
These income producing assets tend to rise during periods of high inflation, but those with little wealth don’t see the benefits. Therefore, not only are the poor affected by inflation through their incomes, but also through their lack of wealth.”
Surviving During Times of High Inflation
High inflation is an abnormality that calls for people not to behave in the usual way. But to act wisely to cushion themselves against the high prices and make life bearable.
It then makes sense to cut your expenditure during times of high inflation. You should save more during times of high inflation and cut down on any unnecessary expenses.
Even though inflation is generalized to a certain average percentage, we all have different inflation rates depending on what we consume and the consumption levels of various commodities.
For example, if beer prices were to rise sharply and I do not personally drink alcohol, then that would hardly affect me.
Also, if the prices of wheat flour increase, and I do not consume any wheat flour products, then that sharp increase wouldn’t affect me.
When you reduce your spending and increase your savings, you are essentially reserving your purchasing power only for things that matter to you.
The Best Inflation Hedges
Be The Best at What You Do
At the 2022 Berkshire Hathaway annual shareholders meeting, Warren Buffett gave his advice on the best inflation hedge.
“The best thing you can do is to be exceptionally good at something.
If you’re the best doctor in town, if you’re the best lawyer in town, if you’re the best whatever it may be…people are going to give you some of what they produce in exchange for what you deliver. Whatever abilities you have can’t be taken away from you.
They can’t actually be inflated away from you. So the best investment by far is anything that develops yourself, and it’s not taxed at all.”
Invest in Assets That Tend to Do Well During High Inflation
Regardless of whether the prices of goods and services are rising, some goods and services are so valuable that we can’t do without them. These are the sectors that we should be investing in. Because, no matter how high they price them, we’ll be forced to match their prices for us to survive. We survive at the mercy of their costs. Nick writes,
“Regardless of what you believe about stocks, real estate, gold, or crypto, there is one truism that will always protect your assets against inflation —- own things that provide value to humans.
If you own things that other people will want, no matter what is happening in the world, your purchasing power will likely remain intact.“
As Nick shows in that articles, real estate, equities, REITs, and productive land are some of the best inflation hedges.
Preparation For Hard Economic Times in The Near Future
As we continue to tighten our belts and brace ourselves for more challenging economic times in the near future and to survive this bear market, I would like to end with the words of Morgan Housel in a podcast with Tim Ferris on the Tim Ferriss Show.
“You have to have a level of savings in your asset allocation that doesn’t make sense. You have to have a level of conservatism that seems like it’s a bit too much.
That’s the only time that you know that you are prepared for risks that you cannot envision.”
As the uncertainty continues, we cannot risk lowering our guards. We do not know if a recession is coming or how bad this economic downturn will affect us. The only thing that we can do is to prepare ourselves for worse times as we continue to hope for the best outcomes in life.