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What Can I Do About Inflation?

Castlepoint Blog: Adam Lee, The Point
April 05, 2022

With inflation rising to 7% in 2021, many people are wondering: what should I do about it?1

There are many things you could do, but the question of what you should do depends on a lot of things.

Let’s start with the most effective plan: get off the grid.

Getting off the grid

Inflation is only a problem insomuch as you have to buy things in the future. If you buy everything you need right now, inflation will, very literally, no longer be a problem for you.

Now, I’m no expert in off-grid living, but with a quick Google search, I was able to find this article that seems to offer a good jumping off point. The very abbreviated version: you’re going to need to purchase some land, shelter, tools and materials for maintaining your stuff, crops and/or livestock to begin your farming enterprise, a water collection system, an energy generation system, and a few other essentials.

Wait, I don’t want to get off the grid!

Ok, fair enough. You don’t want to start milking cows in your free time. Designing a water collection system sounds hard. You are insufficiently committed to completely avoiding inflation, and you aren’t willing to get off the grid. Are there any other options?

Why, yes, there are! And, while they don’t involve milking cows, they share more in common with getting off the grid than you may think.

Don’t Rent

In fact, if you own your home, you are already about 1/3 of the way to the get off the grid solution. How, you ask?

Well, in 2021, the costs related to “shelter” made up about 1/3 (or, ~32%) of the inflation calculation.1 If you own your home instead of renting, you have effectively eliminated 1/3 of inflation from your life. That’s true even if you have a mortgage: those payments are fixed.  In fact, over time, inflation puts you in a better position with respect to your mortgage. If you get a 30-year loan, you’re paying the same fixed amount in year 1 as year 30, but inflation makes those payments in year 30 lower in inflation-adjusted terms.

Make Uncle Sam Pay

If you’ve earned wages in your life, you are likely to qualify for Social Security. And, Social Security includes an increase for inflation every single year! That makes it a very uniquely valuable asset in your retirement portfolio.

But there are other ways Uncle Sam foots the inflation bill for you.

Medical care goods and services comprise about 8% of the inflation measure.1 But, most of those expenses occur later in life, when Medicare coverage is available. Now, Medicare is not free, but it is heavily subsidized. So, some of the more dramatic medical bills in your life are likely to be picked up at least partially by the government.

Be Reasonable

The inflation you normally hear about is called “unchained” inflation. There is another measure, which is consistently slightly lower, called “chained” inflation.

“Unchained” inflation assumes it takes you up to 2 years to change your purchasing behavior based on prices. For example, let’s say you make eggs and bacon every Friday morning. It’s a family tradition, and you don’t want to give it up. But, there is an unexpected, highly lethal, chicken and pig virus that sweeps the globe and wipes out 99.9% of the chicken and pig populations. Bacon now costs $5K per pound, and eggs are $500 each. Which of the following would you do?

A: Find a new breakfast tradition for a while

B: Sell all your material possessions, make your children get part time jobs, move to a tiny home (not the “cute” kind you see on TV), and continue eating bacon and eggs on Friday.

Option A is chained inflation. Option B is unchained inflation, which is what’s popularly shared in the media.

What else?

If you want, you can go line by line on the official inflation numbers and think of more examples. Worried about the 2.5% of inflation driven by electricity prices?1 Buy yourself some solar panels. Afraid of the .05% driven by lettuce prices?1 Stop eating lettuce. You’re an adult now—no one can make you!

Of course, if you keep going with that, we end up right back where we started: getting off the grid. And, we’ve already established: you don’t want to milk cows.

But, at the very least, I hope this article has reassured you that a good chunk of inflation is:

  • avoidable by buying your own home
  • eventually subsidized by Medicare
  • offset by Social Security inflation adjustments
  • mitigated by other common-sense measures you may choose to take

That’s not to say inflation is irrelevant: if you buy stuff, you are going to experience some inflation. We account for inflation when building portfolios that maximize your chances of success. But, we are not powerless. Inflation is just one of many things we plan for when building a portfolio to provide you a life of abundance.

Sources:

  1. https://www.bls.gov/news.release/archives/cpi_01122022.htm

The content of this article is developed from sources believed to provide accurate information. The information is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. All expressions of opinion are subject to change. This content is distributed for informational purposes only, and is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services. Past performance is not a guarantee of future results. Index performance does not reflect the expenses associated with the management of an actual portfolio.

Adam Lee, CPA at Castlepoint Wealth Advisors

Adam Lee, CPA

Portfolio Manager

Adam is a Portfolio Manager for Castlepoint Wealth Advisors, an Independent Wealth Management firm in Oklahoma City. He refines and implements the firm’s investment philosophies and strategies to ensure each and every client portfolio is efficiently and effectively driving progress toward clients’ goals. He also provides planning support on specialized illiquid client investments, or other unique financial circumstances.

Read more Adam Lee’s blog posts and articles.