Inflation: It's What's for Breakfast Milk's not the half of it. Today's rising prices mean you'll need fresh strategies for your money
(MONEY Magazine) – There's been a lot to cheer about in the U.S. economy lately. Earnings, production, job growth--up, up, up. But before you start the backflips, watch out: The feds and the Fed have flooded our economy with so much money--giving us high deficits, low taxes and ultralow interest rates--that any economists see inflation coming. After 20 years of relative stability, consumer prices are rising at a 3.1% annual clip, while wholesale prices are up 5%. And don't forget: The consumer price index offers an incomplete picture of the levitating cost of living--it doesn't include, for example, health insurance premiums, which are rising at double-digit rates.
Should you worry? Not yet. One reason prices are rising is that the economy is getting stronger. "The key is whether consumers' income will be able to keep up, and that looks encouraging so far," says Anthony Karydakis, senior financial economist at Banc One Capital Markets.
Even so, a little inflation can go a long way toward destroying the value of your assets. At a 5% annual rate, inflation will halve your money's buying power in just 15 years--a scary thought if you ever want to retire.
The time to protect your finances from inflation (as much as anyone can) is now, before prices really take off. That'll require fresh thinking by those of us who've been tranquilized by nearly two decades of low inflation. Here are four strategies for an inflationary world.
--IF YOU NEED IT, BUY IT NOW Until recently, it paid to wait before you bought the object of your desire, whether it was a car or a cashmere sweater. Eventually, you'd be able to scoop it up at a discount. But times are changing. The gas pump and the dairy case may have been the first places you noticed prices marching in the wrong direction, but they probably won't be the last--and by then, waiting to buy will have cost you dearly.
--FIX THE RATE ON YOUR ADJUSTABLE-RATE DEBT Inflated money loses its value over time because it has less purchasing power. If you borrow, you'll be repaying with cheaper dollars. Good! But lenders know this too and protect themselves by charging higher interest. Bad! (Or, at least, expensive.) A third of new mortgages are adjustable-rate versions, leaving homeowners vulnerable to rising rates. Far more people have adjustable-rate home-equity loans and lines of credit. If you're one of them, now's the time to convert to fixed rates. After all, why wait for your house payments to soar?
--SWITCH TO SHORT-TERM BONDS With shorter-term bonds (held for three years or less), your principal won't get hit as badly when rates rise. And as holdings mature, you'll be able to cycle into higher-yielding issues.
--IN THE WORKPLACE, GO FOR PERKS Yes, you're still waiting for the hefty raise that's been put off since the recession. But snaring better benefits can be valuable also. Health insurance premiums, for instance, increased 13.9% last year. Anyone you know get a raise that big? --MARION ASNES