Last year, my brother asked me how concerned he should be about inflation.
My response was the same as that of Geena Davis’ character in the 1986 film The Fly: “Be afraid. Be very afraid.”
I was half joking.
At the time, inflation was sitting at a 30-year high of 5.4%.
U.S. inflation now stands at 7.7%. Yes, that’s down from the 40-year high of 9.1% we saw in June, but one thing is clear: Inflation is still something to be afraid of.
Ongoing supply chain constraints and increased demand are not only leaving store shelves empty but also leading to pay increases for workers. Add in additional government spending and all of that cash sloshing around, and prices will go even higher as we chase a limited supply of goods and services.
Inflation is like a parasite. You don’t realize you have it until one day you wake up sick – except in this case, it’s your wealth that suffers.
From 1914 to 2021, the historical average of the U.S. inflation rate was 3.24%. That doesn’t sound like much. But if inflation were at the historical average of 3.24% for five years, what cost $1,000 at the start of that term would cost $1,172 by the end. In other words, you’d need 17% more money to buy the same goods and services.
At 7.7% inflation, you’d need 45% more money. That’s just after five years.
So what should you do about it?
It depends on what part of your assets we’re talking about. Steps to take with your cash are very different from what to do with your longer-term holdings.
Below are a few things you can do to protect your assets from inflation.
For your long-term funds, I strongly recommend investing in Perpetual Dividend Raisers. These are stocks that raise their dividends every year. This way, you’re growing your income, and if the dividends are boosted at a higher rate than that of inflation, you’re actually increasing your buying power.
Look for companies that have a track record of annual dividend hikes that continually rise by a meaningful amount. Raising the dividend 1% per year won’t help much.
A company like Enbridge (NYSE: ENB) has raised its dividend every year for 26 years. Over the past 10 years, the compound annual growth rate of the dividend has been 10.9%. That should keep investors well ahead of inflation.
Readers of my newsletter, The Oxford Income Letter, were told about Series I bonds a year ago. I bonds are U.S. government bonds whose interest rates reset every six months according to inflation.
The current rate, announced last month, is 6.9%.
You can’t cash out of the bond within the first 12 months. If you sell before five years pass, you lose three months’ worth of interest.
But these bonds will keep pace with inflation, protecting your funds.
The maximum you can buy is $10,000 per person per year, plus another $5,000 if it is purchased with a tax refund.
This is a great way to hedge against inflation without risk, as long as you don’t need the cash within one year.
To buy I bonds, visit the TreasuryDirect website here.
This one is tougher. You won’t get adequate inflation protection with a short-term investment. Interest rates on money market accounts and certificates of deposit (CDs) are just too low.
At this moment, for your short-term money, I like Treasury bills. You can earn nearly 3.6% annualized on Treasurys maturing in four weeks, 3.8% in eight weeks, almost 4.1% for 13-week T-bills and 4.4% on Treasurys maturing in 26 weeks.
Unlike CDs, T-bills are liquid, meaning you can sell anytime you like and get your money out with no penalty. And if rates happen to fall, you could even see a small profit.
I expect inflation to continue higher this year and into 2023. I believe the most important financial step you can take these days is to ensure that your buying power isn’t destroyed over the coming years.