How to beat Inflation with 5 Inflation-Busting Tips

Inflation. What is it? — In short, Inflation is experienced as increasing prices across a broad range of goods and services, and is expressed as percentage. For example, if something you used to pay $1 for a year ago at your local supermarket is now $1.10, the inflation rate on that product is 10% per annum, or famously put another way,

“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.” — Sam Ewing

Inflation also causes the value of your savings, and real wages to shrink, because the amount you’re able to buy with the amount of money you have becomes less and less. This is referred to as a reduction in purchasing power.

A brief look back at inflation

Typically, central banks (like the Federal Reserve and the Bank of England) try to put policies in place that attempt to keep inflation at around 2%, which is considered fairly normal for a healthy, expanding economy — and for the last 40 years this was on average about what we experienced in the western world.

However, the truth is inflation fluctuates, sometimes wildly. Which was what occurred during the 1970s and 80s, when prices shot up to 10 and 15% year on year.

In 2022 Inflation has become a hot topic as it’s been on an upward trajectory since mid-2021 and is now at a 40 year high — causing people to wonder how much higher will prices go? As of mid-2022, the average US and UK consumer is paying 9% more than they were 12 months ago. In Australia although the “official” figure is 5%, some items have increased up to 300% — such as the humble lettuce which the media have turned into the poster-child for Australia’s rising cost of living.

Why are we experiencing Inflation now and what can be done about it?

Opinion on the causes of today’s inflation vary, however some most likely reasons are:

1) Covid-19 — Governments’ Covid-19 measures such as mandatory business shutdowns brought production in most countries to a halt, and led to supply chain issues, which leads to higher prices. Additionally, through stimulus packages, Governments were printing money like never before, — consequently the more money floating around, the less value it has.

2) The general expectation of prices rising — In Princeton economist Alan Blinder’s view, the inflation experienced during the 1970s was partially due to the expectation by Americans that general high inflation was to be expected following heavy spending by the government on the Vietnam War and spiralling oil prices. Corporations put up their prices, and that psychology became a self-fulfilling prophesy.

“Once that psychology sets in, it tends to perpetuate itself.” — Fed chairman Jerome Powell

3) The Ukraine conflict has also been blamed for leading to higher energy prices, meanwhile lockdowns in China have led to disruption of traditional supply routes, causing supply-chain bottlenecks — driving prices higher and making the cost of living more expensive.

According to a New York Times-funded poll conducted in April 2022, most Americans agree, with the majority believing Covid shutdown measures and resulting money-printing stimulus packages to be the main culprits. Do you agree with them?

The way most governments and central banks try to reduce inflation is by raising interest rates, in the expectation that more of your pay-check will go towards your mortgage or your rent, and therefore you’ll be less likely to buy new things. Their aim here is to reduce demand. But as we’ve just seen, demand is not considered the main driver of today’s inflation, it’s issues on the supply-side.

So, what can be done to fix supply problems and halt inflation? There’s not a lot that governments can effectively do in this case, with shipping being mostly out of their control. They could try constructing more shipping capacity, but that would take many years. Or they could try to absorb price increases, like in France for example, where energy has been capped to a 4% annual increase. This only works however, if the energy companies (as in this case) are owned by the Government.

As you can see supply-side inflation is more difficult to manage, and the solution — solving shipping bottlenecks, and increasing competitiveness and productivity, can take a substantial time to kick in.

So what can you do to protect yourself from Inflation?

Here are our 5 Inflation-Busting Tips to help you get through:

1) Lock in a longer fixed-rate interest period or negotiate your rent with your landlord. With central banks increasing interest rates a number of times already in the past few months and inflation still rising sharply, it might make sense to lock in a longer fixed interest rate period the next time you re-mortgage, if there aren’t any significant penalties to doing this. This could offer you greater peace of mind if interest rates continue to creep up over the next few years at the same pace they have already.

If you’re renting, and the Landlord wants to increase the rent by, say $50, see if you can come to an agreement, by suggesting maybe meeting in the middle, like $25. They might decide that that’s a better option than to risk losing you as a tenant, and losing income while searching for a new tenant.

2) Change your buying habits. This could be one of the simplest ways of bringing down your grocery bills. Sarah Coles from the UK financial firm Hargreaves Lansdown advises “You might, for example, switch from fresh fruit and vegetables to frozen, canned pulses to dried ones or fresh pasta to dried. You may also be able to save by switching to own-brands or budget ranges. There are plenty of ways to spend less in the supermarket, even when prices are rising.”

Is switching supermarket products something you have tried? Did you notice any difference to the more expensive branded products?

3) Stockpile essentials. Building a stockpile of the things you use regularly can help you fight inflation by buying them now, before they increase in price, and usually buying larger quantities works out cheaper than buying smaller quantities.

Recent shortages during the pandemic showed that keeping a stockpile of food and other goods you commonly use is also a good buffer or insurance policy should something go wrong.

Build your stockpile gradually, however if something you use often is on sale, stock up on as much as you know you have space for — especially long shelf-life items like canned goods, pasta, and non-perishable items such as cleaning supplies, toothpaste and medications.

If you live in an apartment or are short on space, there are many creative spaces that can be used for storing your emergency supplies, for example under the bed, or even the space under your sofa.

4) Consider looking for a higher paying job. Right now, the unemployment rate in most western countries is very low, meaning there are many more jobs on the market than candidates and many employers are struggling to fill vacancies, especially if you have niche skills.

Not only are there more job opportunities, there is also less competition for roles, so now is a good time to secure a higher paying job, promotion, or something with a better work-life balance. Job choice, pay levels and negotiating power are all on the employee’s side right now, so it’s worth applying for higher-salaried positions which will help protect you from the effects of higher prices.

5) Invest in Yourself. Perhaps Warren Buffet has the wisest advice — at his company’s shareholder’s meeting in 2022, when asked about the best course of action during rising inflation he said:

“The best investment by far is anything that develops yourself, and it’s not taxed at all.”

“Whatever abilities you have can’t be taken away from you. They can’t actually be inflated away from you.”

Investing in yourself could mean working on developing skills you know you’re not strong in, or learning new skills by taking online courses or certificate programs. Not only will your self-worth increase, so will your value in the job market or you might even decide to finally start your own business.

“Whatever you want to learn more, start doing it today. Don’t put it off to your old age.”

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