Inflation is perhaps the most pernicious form of economic decline. There’s no escaping it, taking advantage of it is very risky, and it doesn’t “go away” after a while. Inflation is a nightmare that keeps more than a few preppers awake at night.
Inflation is what makes burying cash in a jar in the backyard untenable. Inflation is what makes saving in a traditional savings account a losing proposition. Inflation (along with artificially low interest rates) is what forces you into riskier and riskier investments just to preserve your value. However, this is just run of the mill inflation. Run of the mill inflation doesn’t evaporate your savings’s value overnight. It sneakily takes a little here or there, compounding on itself, just like interest does. Pretty soon, that $1000 you put away for a rainy day has the buying power of $500 (at the time of saving), and you have to scratch together another $1000 just to keep pace. As Ron Paul noted, people who used to rely on simple saving (the poor and middle class) are hardest hit. Things are more expensive, including the essentials. It’s hard to escape when food and medicine and basic living commodities cost more and more.
However, in normal times, inflation isn’t really something you need to prep for. It’s just something to be aware of when making plans. Save more, don’t have too much in cash, make sure your investments are beating inflation. That’s about all you need to do to stave off run of the mill inflation.
Acute inflation is different. We don’t need to get into hyperinflation for the pain to be very real. Stagflation is a real concern, especially with the amount of macro-level “fixing” the government and the Fed have been doing for the past few years.
It’s hard enough to prep for inflation that overcomes the expected growth in the stock market, but the broader economic instability that would come along with a growth in inflation are nearly impossible to predict and prep for. Generally, the expectation would be that an uptick in inflation would be accompanied by a recession. How does one prepare for an increased likelihood of unemployment alongside a growth in inflation? It’s not easy.
Just taking the inflation into account in a vacuum, the answer is to buy now and pay later. Get into as much (fixed interest) debt as possible and pay it off when money is cheaper later on. However, that’s a massively risky plan if you don’t have guaranteed income to pay it off. Going into massive debt is a horrible idea when the economy is on shaky ground. Any number of pillars of your financial security may be eroded and could send you into bankruptcy, foreclosure, repossession, unemployment, etc.
On the other hand, just taking the economic uncertainty in a vacuum, the answer is to hoard cash and ride out the troubles. Cash in hand, cash in savings accounts. Bypass the long term gains in order to have short term stability. Save, save, save. Of course, when you introduce large inflation into the mix, all that saving is undercut by the erosion of value of those savings. Great, you saved 18 months of expenses in your savings account. Guess what… now it’s only 17 months… and now 16 months.
How do you prepare for the whole enchilada? How do you take both economic uncertainty and inflation into account? The least bad answer is balance. I haven’t been convinced that there is any good plan to handle such times, but you can be less exposed than most other people by hedging against both eventualities.
First, think outside of the dollars and cents. The most effective solution may not be a financial one, even though the problem is economic in nature. Personally, I wouldn’t go into debt to fight inflation, but I would be tempted to (and have currently started to) reroute funds that would have otherwise gone into retirement investing instead to buying things that we will eventually need. For example, we’re funding our down payment fund extremely aggressively with the goal of being ready to pull the trigger in 18 months rather than in 30 months as originally planned. Now is a good time to start stockpiling non-perishables, with the expectation that prices (sticker and real) will only go up on those goods. Prioritize purchases that will reduce your recurring costs in the future. Can you grow/improve your garden, buy some ammo, buy canned goods, emergency supplies, upgrade to a more fuel efficient car, etc. without going into debt? Now’s the time.
Second, reduce recurring costs. There are two sides to the ledger, income and outlays. You may not have all that much control over the income side if the economy gets unstable, but you have a lot of control over the outlays side, and the benefit is that reducing costs is even more effective in inflationary times. What costs should be targeted? The most variable costs. Restaurants are gonna get expensive. Grocery is already seeing inflation in the prices. Can you eat in more? Can you cook more instead of buying pre-made food? Can you grow and store some of your own food?
Utilities are also a fertile ground for reducing recurring costs. That HVAC upgrade you’ve been thinking about for a few years is a good way to reduce your electric/gas consumption. Blow some insulation into your attic and inject spray foam into your walls. Now may also be a great time to buy a fuel efficient car for commute/travel. Gas prices are probably not heading downward in the near future.
Like we are doing, having a plan to get out of a rental and into a mortgage (or pay cash if you’re financially able) reduces one more vector for inflation to creep in.
Third, do actually keep some cash available. Inflation isn’t instantaneous (and when it is, there ain’t much you can do to prepare for it). Having 6 months of barebones expenses in liquid cash protects against job loss without exposing too much of your nest egg to corrosion via inflation. It’s a balance. You’re insuring against short-term catastrophe by taking a long-term loss on a certain amount of your money. It’s cheap insurance where you get to keep most of the premium.
Finally, when you’re stable enough to not worry about the immediate uncertainty, you can start making money off of the coming downturn. Now is the time to invest some for dollar cost averaging purposes, but we’re in the midst of a broad-based bubble. When the bubble pops, assets are gonna be cheap. The smart investors will scavenge the wreckage for great deals. Land, cars, stock, you name it. People will be desperate, and that means clearance prices.
The ten million dollar question is timing. When is the next economic downturn going to hit, and how big will the inflation be? IMO, it’s going to be sooner than later, but the market can stay irrational longer than anybody can stay solvent. No point in over-relying on this specific scenario happening by a certain time period. Just another scenario to add to the broad based prepping that you are already doing.