How do businesses and consumers prepare for inflation? The amount of income that people earn on average is rising very little, if at all. The American consumer does not have much more purchasing power today than he or she did a decade ago. Americans are still heavily in debt, and many can no longer cash in on the equity value in their homes because they are under water—the current value of their homes is less than they owe on their mortgages.
As a result, in the short term, many Americans may feel that they face only one option: frugality. In the short term, perhaps, frugality is an answer.
Longer-term, however, the right answer may be to find and buy assets likely to appreciate in value faster than the rate of inflation. Real estate, precious metals, and gemstones seem to be the best candidates to fit that bill. Among these, real estate seems the most depressed; given the imbalance between supply and demand, there are some terrific potential bargains out there.
Women (and men) who are over the age of 40 or 50 face an especially acute problem. While people just entering the work force have decades to build retirement funds, hopefully making and saving more and more each year, an older cohort may only have a decade to do so. Their decisions today will make the difference between a comfortable retirement and a struggle.
Inflation is already a reality at the early stages of processing in the global economy. It may be hard to see in the government indices today, but next year will be a different story. It is time to prepare for a financial future that could be quite different from the past thirty years, when bonds increased substantially in value. Inflation is the arch-enemy of bonds. Bond investors benefit the most when consumer price inflation falls, and inflation has been falling for the past thirty years.
Fixed income could become a trap for the baby boomers as inflation takes off, eroding the purchasing power of fixed payments. We’ve just seen an example in our loss of purchasing power as measured by turkey. It’s not as silly as it sounds. In fact, the loss of purchasing power—and our standard of living—as measured by most goods and services could be quite profound. Be on guard.