Stay focused to survive coming inflation

A new generation of Americans is about to face the impact of inflation — on their daily lives, their financial decisions, their investment choices, and their retirement lifestyle. While many pundits proclaim that this period of inflation will come to a quick end, history shows that inflation has always ended not with a whimper, but with a bang.

History tells us the only way to stop inflation is to slow the economic demand by slowing the economy. That slowdown comes from raising interest rates. Paul Volcker had the determination and discipline to do that in the early 1980s.

As Fed chairman, Volcker pushed the prime lending rate to 21%. Mortgage rates jumped to over 15%. And the economy moved into a steep recession. It worked — but not without pain.

Current Fed chair Jerome Powell tried to wish inflation away by pronouncing it transitory. But the Fed has just started to act. Interest rates remain historically low. And inflation is roaring.

The longer the Fed waits, the more likely we will see double-digit inflation in the coming months. In an election year.

Even if the Fed moves soon and more strongly than expected, policy always works with a lag. That means a slowdown (recession?) would come at exactly the wrong time — at election time!

Will Powell have Volcker’s guts to ignore politics and act strongly and immediately? That is the big question. But make no mistake: either way there will be pain. Higher mortgage rates will slow the housing market and spending.

But there’s more upward pressure on prices to come. Ukraine is Europe’s breadbasket — and harvests this year are predicted to be from 20% to 40% lower this year, while their ports are blocked, limiting exports. Shortages can only lead to higher food prices — and even hunger.

Hiding from inflation

This coming period of inflation will be devastating for retirees living on fixed incomes. For 2022, Social Security checks jumped an astounding 5.9% (though impacted by higher Medicare premiums). The latest predictions suggest an 8.9% increase in Social Security checks for 2023. But that still likely won’t keep up with increased costs in everything from rents to food.

Stocks have always been a good hedge against inflation — over the long run of at least 20 years. But those 20-year periods included deep market declines. Watching a retirement account shrink could cause panic selling.

Keeping some cash on the sidelines risks the impact of inflation. Still, if you need cash for living expenses, it might be worth taking the inflation hit to have some immediate liquidity, so you’re not forced to sell stocks at a loss for required withdrawals. Free market savings rates will rise — eventually.

Bonds can also lose value because of inflation. Who wants your old 3% 20-year bond if inflation rages much higher? No one will give you that $1,000 face value for an old-low rate bond, even from a great company. If you don’t sell and take the loss, you’re stuck earning less.

Gold might be old-fashioned, but it has awakened from its long sleep as an inflation protector, now approaching the $2,000 mark, while so far crypto hasn’t proved a good place to hide from either governments or inflation.

Series I Savings Bonds have

become the go-to inflation beating investment. Currently they carry a 7.12% rate, which will be adjusted every six months in May and November to match inflation.

Expect the May 1 adjustment to be higher.

Commodities — everything from energy to soybeans — are rising in the face of inflation expectations. You can hedge by using ETFs that track commodity prices. But be warned that these are volatile investments.