Recent months have seen a large increase in talk about the possibilities for increase in financial inflation. Can just talking about bring it about?
Prices Rise, That’s Life
Anyone who shops for necessities in recent weeks and months can attest to the rise in prices for many items. Anyone who has shopped for food knows the reality of the present price increases. Anyone who pays for home utilities has experienced price rises.
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In general, prices are a flexible item–sometimes they increase, sometimes they decrease. And perhaps we will see decreases eventually, but what can clearly be seen is that increases in so many items bodes poorly for financial stability.
Classical
The classical definition of inflation is “too much money chasing too few goods”. Let’s not debate definitions and explanations; daily life is not an academic discussion. If you see consistent price increases in a wide variety of items, you know inflation.
Extremes of price increase do fall back to earth periodically, at least that is the hope. For example, in recent months there has been an extreme increase in prices of many lumber products. And then some decreases. Will prices return to the previous levels? Hard to say.
Talking Heads
Economists debate the situation, but real people like you and me feel its effects. Long before the economists act, rising prices penalizes us. Prices rise, and we pay those prices, but any rise in our income does not match that which we pay. So inflationary pressures cause a net loss for us. We lose purchasing power, and we suffer a loss in our net worth.
Transitory
We hear some suits talking about the currect spike in prices as “transitory.” Is that possible? Maybe. I doubt my local utilities that are currently raising prices will ever lower them. I have never experienced a reduction in utility prices. Have you?
What Can Be Done?
I doubt that writing letters to the Federal Reserve will amount to anything. What could help is owning inflationary-linked assets. What are inflationary-linked assets? These are items that provide income that is linked to inflation. This is not always easy to understand. Which types of income-producing property are inflation linked?
Some bonds are inflation linked. One example is Treasury Inflation-Protected Securities (TIPS). There are numerous mutual bond funds that include inflation-protected bonds.
Income from real estate could provide income, as rents tend to rise (and fall) based on inflaion, and many other factors.
Dividends could provide some inflation protection, as rises in inflation often are reflected in increased dividends paid. However, stock prices and dividends are volatile, and there is no guarantee that dividends can match inflation.
Another approach is reducing dependency on items that are under inflationary pressure. This seems the surest way to hinder inflation’s bite.
What are you doing to adjust to inflation? Let me know here.
The illustration “The Defence of the Sampo “(1910-12) by Joseph Alanen, is said to be inspired by the Kalevala, the epic poem of Finland. Courtesy, University of Toronto.
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