12 Ways To Beat Inflation: Don’t Let Rising Prices Get You Down

by Silicon Valley Blogger on 2007-09-1830

I’m following up on the article I wrote yesterday that covered some facts on inflation. I’d like to preface this post by saying that we’re in a good place right now: inflation is not a threat to us today with it being under control. But it remains noticeable to us in some respects, such as when we note that gasoline and energy prices readjust upward, or when commute costs steadily climb. So it’s just natural for us to want to keep up or outpace these changes.

Inflation is tame today, but its effects sneak up on you after a long period of time (like grey hair and extra pounds). With the purchasing power of the dollar eroding gradually with time, we count on our work incomes to make up for this. But what happens when we retire from stable jobs sometime in the distant future?

What can we do to cushion ourselves from the impact of inflation in the long term?

I found this quote from the Wikipedia quite telling:

Inflation is also viewed as a hidden risk pressure that provides an incentive for those with savings to invest them, rather than have the purchasing power of those savings erode through inflation.

Inflation, Cost of Living

In my mind, there are a couple of strategies we can implement to protect our finances accordingly:

Two General Strategies To Beat Inflation

  1. Recognizing that inflation erodes purchasing power in the long run. You can make sure you are well invested for the long term so that the performance of your investments more than make up for any kind of inflationary effect that our money experiences throughout the years.
  2. Being mindful of when inflation rates rise. You can monitor inflation rates, recognize upward inflationary pressures and capitalize on these changes as it happens.

Let’s take a look at these plans in more detail.

Insure Yourself From Inflation For The Long Term

#1 Buy a house.
If you buy a house today, you are automatically hedged for inflation. Your house is a fixed asset and any kind of fixed asset becomes more valuable with time thanks to all around asset inflation.

#2 Consider landlording.
If you invest in real estate today and become a landlord, you’ll be happy to know that rents are subject to inflationary pressures as well. You have the capability to raise rates when the cost of living goes up everywhere.

#3 Build or preserve your earning power.
If you are in a position to earn, the best way to battle pricing increases is to keep a job or some other income stream going. You then expect wages and earnings to go up along with everything else. Without earning power, you may want to consider other ways to protect yourself from inflation, such as amassing appreciating assets.

#4 Own your own business.
Once you’re a business owner you can always raise rates, fees, prices along with the costs of operating your business. This is yet another reason to escape corporate serfdom.

#5 Keep a diversified investment portfolio.
Keep a core portfolio of stocks and bonds, and if you’re a bit more adventurous, you can reserve a small amount of your portfolio to inflationary hedges such as precious metals, commodities and real estate.

#6 Consider using inflation-indexed securities in your portfolio.
You want insurance from inflation? Then try TIPs and I-Bonds, which are types of bonds that offer inflation protection. Some good points about these investments: even in the case of a deflationary environment, you still receive the face value of the bond while interest rates keep at zero or higher; these bonds do not correlate with typical asset classes like stocks and bonds, so they offer diversification; and they pay out more when inflation rises. For details on TIPs and I-Bonds, check these great resources: Morningstar, Andrew Tobias, MSN Money, Motley Fool and Wisebread.

Here’s a helpful table that compares TIPs and I-Bonds.

You can buy TIPs from the Treasury Department at TreasuryDirect.gov, Vanguard (VIPSX), Pimco and TIAA-CREF Inflation-Linked Bond (TCILX). While you can purchase I-Bonds at the Treasury Department as well.

Counteract Inflationary Pressures With Additional Moves

Once inflation creeps up, it could spell bad news for stocks and bonds. So here are a few, more anticipatory (or even reactionary) strategies to counteract inflation’s effect on your portfolio.

#1 Keep money in short term funds.
When there are inflationary concerns, it may be best to keep your money in short term accounts where you don’t lock in rates. This is because higher inflation rates are soon followed by higher interest rates as well. Keep you options open at this time.

#2 Watch interest and yield rates and lock them in when you’re comfortable.
When inflation trends are higher, interest rates typically follow suit. To this day, I have family who were “lucky” enough to lock in sky-high interest rates with long term high-yield CDs when rates were so much higher.

#3 Invest in commodities.
Buying commodities is a traditional inflationary hedge. If you’ve somehow decided that commodities aren’t your thing during periods of tame inflation, you’re not alone. But you may want to reconsider this unconventional asset class once inflationary pressures increase.

You can check out PIMCO Real Return Commodities Fund (PCRIX) which invests in a variety of commodities, or those that track the Dow Jones AIG Commodity Index, which invests only 35 percent to 40 percent in energy such as Deutsche Bank Commodity Tracking Index (DBC). MONEY Magazine also recommends the T. Rowe Price New Era (PRNEX) mutual fund as a good inflation hedge.

#4 Invest in gold.
How about gold? It’s no secret that gold has had a spotty performance throughout history. This is because it may be considered more as a “crisis hedge” rather than an investment. During peace-time, gold has had weak returns. At any rate, if you want true crisis insurance, you can buy gold through these avenues: as gold bullion and coins, exchange traded funds, stocks, mutual funds and even jewelry.

#5 Rework your debt.
When you carry debt, you benefit from a rise in inflation since the value of owed money is worth less over time. So you actually get a break if you carry a bunch of debt such as school and car loans, home equity loans and such. For instance, if inflation rates leapt by several percentage points, any money you’ve borrowed in the past would be worth less than the money you borrow at current rates so by trading any variable-rate debt such as credit card debt or home equity lines of credit) for fixed-rate debt, you’ll actually benefit from an environment with higher inflation.

#6 Cut your spending even more.
This should be the simplest advice but may be the hardest to follow: think hard before you buy anything. Practice abstinence: when items are priced higher, you’ll be spending more, so try every excuse you can to avoid making purchases. Or change your shopping habits so you buy at lower cost places.

Image Credit: ParkerSpace.com via Cagle Cartoons and Big Picture

Copyright © 2007 The Digerati Life. All Rights Reserved.

{ 19 comments… read them below or add one }

david September 18, 2007 at 9:48 am

The U.S. dollar is kind of weak right now so buying gold can help protect yourself from the weakened currency right now.

Money Blue Book September 18, 2007 at 11:46 am

The best way to keep ahead of inflation is simply to actively invest broadly. Real estate is a good inflation hedge but can get hit during housing recessions.


Bill September 19, 2007 at 12:34 pm

Your own personal house should be viewed as a place to live.

At best, like gold, it holds purchasing power (long-term, real return to real estate is 1.5% or less)

If you want real returns above the rate of inflation, financial assets are the place to be.

Financial assets have always been much more liquid than real estate as well.

Kyle September 19, 2007 at 2:08 pm

Great advice, I always believed that owning a home was a great to way to hedge against inflation. Real Estate can get hit by recession but it does not matter if you are the housing market long term.

Silicon Valley Blogger September 20, 2007 at 10:11 pm

All the points made here are spot on. The reason you want to invest is to hedge against inflation. Those playing it too conservatively may discover that decades later, their conservative play wasn’t the wisest way to go, given the effects of inflation.

Patrick October 3, 2007 at 1:00 pm

Great post. I think the US is seeing a lot of inflation right now, as well as the added pressure of the falling dollar compared to foreign currencies. Many of these tips work against the falling dollar as well.

The Car Site February 3, 2008 at 7:24 pm

A good list of ways to fight inflationary pressures. Since this was written in September, I’d say your advice to invest in gold was quite prophetic.

Sherin February 21, 2008 at 4:07 am


I am somewhat agree with the points mentioning in this article. As you said in the General strategies, it is impossible for an ordinary person to identify and act against inflation all the time. It is impossible to keep track always. A general and practical method only can able them to beat the inflation but till an extend.

As you mentioned, investing in funds and stocks cannot give you the required result against inflation. But, gold can be keep as a hedge against inflation and it is a tested one. One can accumalate gold or fold funds and that will make sure that he can work against inflation. Owning a house and land lording also can beat inflation and I am agree to that. But all the people cannot go for that. In our time, investing in gold as large and small is possible and an ordinary person can arrange his money to invest in gold in a better way. Debt in a flat rate cannot do more with inflation but a proper repayment method can activly enhance the financial freedom of one. Commodities cannot do anything against inflation. Of course a better job with enough possible appreciation in time to time will able you to protect from inflation even though till an extend.

In these cases, a best possible answer to beat inflation completely is investing in Gold and gold funds, buyiung land.

You are welcome to visit my blog http://investinternals.blogspot.com to see how gold can protect you from inflation.

Feedback to investinternals@gmail.com is highly appreciated

Sell Scrap Jewelry Online February 24, 2008 at 2:03 pm

Great series of tips. Might be too late for some, but there are definitely things you can do to “tighten” up and protect yourself

Foreclosure Bank Owned Real Estate March 11, 2008 at 2:04 pm

This is a tight article for tightening up during our current downward spiral into recession. Money is going to be tight for a while, but there are definitely ways to scrape to get by. Good job!

Debora Y. Edholm April 4, 2008 at 7:03 am

I agree with everything said. Options are an excellent way of hedging against inflation. Especially now when food costs are skyrocketing and wages are remaining the same.

B. Rene Williams June 22, 2008 at 1:28 pm

Great post!

One of the things I always like to think about together with inflation is the concept of “present value.”

There are multiple formulas on the Web that help you calculate the present value of a good/commodity you are interested in buying. The formula factors in the item’s potential to increase in value or pay out interest in future inflated dollars.

That’s why when somebody says that I’d better buy something now because the price will go up (including real estate), I counter with “yes, but that doesn’t necessarily mean the item will be more expensive in the future.”

I could have more money to pay for that good too, if I invest my money today in something reliable like a T-bill or even something riskier that I have confidence will pay off.” A good present value formula could tell you if and when you are set to beat inflation by holding off on your purchases.

That keeps my wallet in my pocket a little more often, but not always.

Thanks for the information!

gearythedebtcouncellor January 1, 2009 at 10:15 pm

i like these tips, hey anything helps!!!

The BoBo July 12, 2009 at 11:04 am

These are all great tips. I find I am actually doing some of them now. I wanted to thank you for your continued support of my Carnival and for submitting this. I hope you don’t mind, but I actually printed this off so I can reference it. At the end of July I will be doing another assessment of my finances and my budget and these tips will help.

Silicon Valley Blogger July 12, 2009 at 11:13 am

I just adore your carnivals 🙂 . I love your insights and thoughts when you publish a new edition, which I find very refreshing for a carnival host. I am honored that you’d print out and reference my article, and very glad that you can share it with your readers. Keep up the great work.

S Hawke December 29, 2009 at 3:24 pm

Investing in gold and silver is a great way to preserve your wealth during times of inflation. Silver and gold bullion artwork is a another way to add value to an already strong investment.

Rent to Own? June 14, 2010 at 10:48 am

Attribute to #2
If you invest on a rental with 25% down with zero cash flow. With only 3% market appreciation you will get 14% ROI on your investment. I don’t know any mutual fund pays off that much on 2% inflation rate as today.

Linda R September 16, 2011 at 8:41 am

I am trying to cut back on my homes spending. It is the only way to try and beat inflation right now, for the average person who does not invest. I try to find ways that my family can cut back without feeling it. That is why I started my blog survivethecostofliving.com.


Patel October 23, 2011 at 1:44 am

Which tool can get me 15% compounded rate of interest each Year ?

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