5 Ways to Beat Inflation Now

The writing is officially on the wall after the Standard & Poor’s bond rating agency downgraded the U.S. government’s credit outlook to “negative” yesterday. The stock market stumbled on the news, and we may get higher interest rates sooner rather than later.

The Federal Reserve’s money creation has resulted in higher inflation numbers, although the pundits are trying to cover up the fact by saying that the “core” CPI, which excludes food and energy, doesn’t look too bad. Yeah, that’s super, if you’re one of those people who doesn’t eat food or put gas in your car.

So what’s a prudent person to do when he needs around a 6% after-tax return on his money to have a chance of keeping up with inflation, but interest rates at his local bank or credit union are just north of diddly-squat?

Here are five plausible ways for you to beat inflation, most of which are adapted from John Pugsley’s 1980 book The Alpha Strategy (now, sadly, out of print):

  1. Invest in Yourself: Use your savings to acquire skills that will provide you a financial return. This might mean acquiring a degree or certificate that will get you a raise at work, or it might mean learning a completely new skill that will enable you to start a side business to generate extra income. If you own a business, it might also mean investing in tools to make yourself more productive.
  2. Purchase Tomorrow’s Consumption Today: When the things you need are going up in price faster than your savings or investments, it makes sense to purchase the things you know you will need in the future now and store them until you need them. Of course, this strategy only works with items that don’t spoil, but there are plenty of those to choose from: canned goods, articles of clothing (socks, underwear), toiletries (razor blades, soap), laundry detergent, etc.
  3. Save in a Foreign Currency: Financial newsletter writer Chris Weber has popularized a “Max Yield” strategy, which involves putting one’s cash into the major world currency sporting the highest interest rate. A new currency is chosen each year (if necessary). The reasoning behind the strategy is that currencies offering higher interest rates are likely to appreciate against the U.S. dollar, giving one capital gains on the appreciating currency in addition to the higher interest income. Although this strategy has not beaten the dollar every single year, over time it has produced inflation-beating returns. Everbank has foreign currency checking accounts and CDs available.
  4. Save “Real Money”: Gold and silver have appreciated substantially against the dollar in the last ten years, and are now at or near all-time highs (in nominal terms). These metals are traditional ways for savers and investors to hedge against inflation and nearly always perform well in an inflationary environment. If you’re the University of Texas, you can purchase $1 billion of gold in the futures market and store it in a New York City vault. The rest of us can buy bullion coins from just about any coin dealer and then store them at home or in a safety deposit box. Make sure the dealer isn’t charging more than about a 3% commission over the current price of the metal for bullion coins. Franklin Sanders offers a monthly dollar-cost-averaging plan for small investors (but only for people outside Tennessee).
  5. Learn the Financial Markets: Most of us have no business being in the financial markets, but the government’s inflationary policies force us into them if we want to have any hope for a comfortable retirement. Make a virtue of necessity and learn as much as you can about the relatively safe strategies available to you that can beat inflation. These might include buying corporate bonds at a discount to par that can provide a decent yield to maturity, investing in blue-chip companies with a history of raising their dividends, or writing covered calls and/or cash-covered puts in an options account. The investment research firm Stansberry & Associates has a family of newsletters that cover all of these strategies.

I hope you find some or all of these suggestions helpful. And in case you’re wondering, I do not receive any compensation from any of the people I recommend above.

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About Dr. J

I am an Associate Professor and head of the Department of Humanities at Faulkner University. I am also Associate Editor of the Journal of Faith and the Academy.
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2 Responses to 5 Ways to Beat Inflation Now

  1. worldtake says:

    6. (this one trumps all others) Live in the present and in the past and avoid living in the future.
    Explanation: When you buy any thing in the present, buy it only with money you have already made or saved. Spending money you have saved or have already earned will keep you from spending more and more money(credit) that does not yet exist and that with our unstable future, nobody can guarantee will exist.
    One more thing:
    Determine the difference between those things you want and those things you need and focus on the latter. Grow up and realize that you shouldn’t expect to have every new piece of consumerist junk that comes down the pike.

  2. Dr. J says:

    I agree that the best strategy is to maintain low levels of debt (we have no debt except our mortgage) and to make wise consumption choices.

    However, these aren’t strategies specifically designed to cope with inflation. Inflation often rewards people who take on high levels of debt because they can pay the debts back down the road in dollars that are worth much less than the dollars they originally borrowed. If you bought a house in 1982 on a 30-year mortgage and never refinanced, your monthly payment today no doubt seems like a piddly amount compared to the market value of the house.

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