How to fight back against inflation

Buy strategically, opt for substitutes and lock in fixed rates for debt to cope with rising prices

High inflation is a big deal if you live on a fixed income or are trying to calculate how much you will need in retirement. Getty

Few economists predict we will return to the double-digit price increases of the late 1970s and early 1980s. But knowing some of the ways consumers coped back then – and how things are different now – can help you formulate a plan to deal with rising prices.

First, a primer: inflation shrinks your purchasing power, so you need more money to buy the same goods and services.

When inflation averages less than 2 per cent, as it did from 2010 to 2020, it would take more than 35 years for prices to double. When inflation averages 5 per cent, which was the annualised rate reported in May, prices would double in less than 15 years. That is a huge deal if you live on a fixed income or are trying to calculate how much you will need in retirement.

“People forget about the potential impact of inflation, since we really haven’t seen very much,” says Penelope Wang, deputy money editor at Consumer Reports.

Here are some strategies that may prove helpful.

Buy strategically

With persistent inflation, delaying a purchase could be costly, since the price is expected to rise in the future. With today’s inflation, that is less clear.

Jerome Powell, chairman of the US Federal Reserve, says Covid-19 pandemic-related shortages and bottlenecks are behind recent price increases. He predicts inflation will ease as the US economy continues to reopen.

That certainly seems to be the case for timber prices. The cost of timber increased by more than 300 per cent from April 2020 to May 2021, adding $36,000 to the cost of the average house, according to the US’s National Association of Home Builders.

But timber prices have retreated substantially from those peaks as pandemic-related shortages ease. If you rushed into a remodelling project or otherwise locked in the high prices, you are probably regretting it now.

On the other hand, you may want to stock up on meat, poultry, eggs, dairy products and fresh fruits and vegetables when those go on sale, Ms Wang says.

Buying on sale is a smart consumer move in any economy and the US Department of Agriculture recently predicted that the prices of those foods will continue to rise this year.

Embrace substitution

High inflation 40 years ago led to the birth of generic groceries – products with stark black-and-white labels that saved consumers money by forgoing fancy packaging. Today, you can find similar savings by substituting shop brand products for name brands. Warehouse outlets remain a good source for bargain hunters.

Acquiring used items instead of new is another potential way to save money. Back in the day, that meant yard sales and thrift shops. Today, we can buy used goods from Craigslist, Facebook Marketplace, among other sites.

Then again, thrift shops have benefited from lockdown clutter clean-outs. Financial planner Barbara O’Neill of Ocala, Florida, volunteers at a local thrift shop and recently scored a large, curved monitor for her husband’s computer.

“I picked it up for $10 and then got half off for being a volunteer,” says Ms O’Neill, author of Flipping a switch: your guide to happiness and financial security in later life.

Lock in fixed rates for debt

The Fed has so far resisted calls to raise interest rates to slow the economy and cool inflation. If that changes, variable-rate debt could cost more. If you have an adjustable rate mortgage and good credit, for example, it could make sense to refinance into a fixed-rate loan, Ms O’Neill says.

For credit card debt, consolidating it with a personal loan could give you a fixed rate and level payments.

Also, be careful about adding any new debt. Inflation theoretically makes paying fixed-rate debt easier, since you are paying back the loan with cheaper dollars. But new loan payments lock in a new obligation when you may need flexibility.

Inflation is not all bad

Those unaccustomed to rising prices may be surprised to discover that inflation has some advantages. It is often easier to secure a raise because employers can pass along the cost in higher prices (although that can start to feed on itself, with higher prices triggering more demands for raises).

In addition, many tax rules and government benefits are influenced by the consumer price index, the official inflation measure in the US.

“There are a lot of things that are tied to the CPI that can benefit some people and help them get a little bit higher income next year,” Ms O’Neill says.

• AP