Inflation: A Significant Risk to Your Finances

Posted By: Chris Tanner ICOR Blog & News ,

Most people have heard of inflation, particularly as of late as the US economy opens back up, but many have no real concept of what it is, and more importantly, its impact on wealth creation and preservation.  

Investopedia defines inflation as the decline of purchasing power of a given currency over time. An everyday example is gasoline: in 1955 the average cost for a gallon of gas was $.29. 40 years later, 1995, the price had risen to $1.15. Today it’s over $3 dollars. The price of gas has risen more than 10-fold in the last six decades. This holds true for nearly all goods and services. The price for goods and services are almost always increasing, which means your purchasing power is decreasing for a given dollar. 

Are we currently living in an inflationary period? As we look around we see home prices have skyrocketed, building materials have jumped and restaurants are charging more. The average Colorado home is up 12.1% since April 2020*. In fact, the average home price in Colorado has more than doubled since 2012*. More shocking, lumber prices are up 240% since this time last year, which helps explain why the cost of new homes has risen on average by $35,000**. According to the U.S. Bureau of Labor and Statistics, the Consumer Price Index (CPI) has risen to 4.2% which represents the largest increase since September of 2008. The CPI is a leading indicator of inflation and takes into account the cost of food, energy, commodities (cars, clothing, etc…), health care, and shelter.

How does one plan for inflation? There are several strategies that tend to shine during inflationary periods. Here are a few:

  1. Money market accounts, TIPS: Keep cash in money market accounts or TIPS (Treasury Inflation Protected Securities). Utilize money market accounts whose interest rate adjusts with interest rate changes. TIPS can be bought directly from the Treasury Direct website, through a broker, or via ETFs
  2. Real Estate: Direct investment in physical real estate, investing via REITs, or joining real estate syndications are all ways to invest.
  3. Commodities: Commodities like Food, Energy, Precious Metals, and Raw Materials have specific stocks or ETFs that focus in specific commodity driven assets. For example, GLD allows you to invest indirectly in gold, and there are countless energy ETFs. The energy ETFs vary from broad investments in overall energy, to very specific investments in renewable energy, or oil and gas equipment providers. You can buy physical precious metals like gold, silver, palladium, or platinum from precious metals dealers.
  4. Debt conversion. Convert adjustable-rate debt to fixed rate debt. In general, interest rates rise during periods of inflation. It is a good decision to lock in low interest rates while they are available and move away from adjustable rate debt when inflation is likely.

If you are wanting to protect your retirement accounts from inflation, and you are a believer in owning physical assets, you should consider looking into a self-directed IRA. Self-directed IRAs allow you to own physical assets like real estate and precious metals. Traditional retirement accounts only permit you to invest in paper-based securities like stocks, bonds, mutual funds, and ETFs. Feel free to contact a business development specialist to learn more.

*https://www.zillow.com/co/home-values/

**https://coloradosun.com/2021/04/29/lumber-prices-new-house-sales/

***https://www.bls.gov/news.release/pdf/cpi.pdf