Jan 11

Inflation Nation: How to Protect Your Purchasing Power

Let’s paint a new picture of America. Your pay is the same. However, when you go on your weekly trip to the grocery store you see that there are no prices on milk. A guy over the loudspeaker announces that milk is now $6 per gallon. Strangely, a guy bought milk at the same location 4 hours earlier for $5.50 per gallon. You notice that it’s not just milk, there are no prices listed on any item and the guy over the loudspeaker keeps announcing the new prices of certain items. Are you in a bad dream? Perhaps. Or perhaps America is now experiencing something called hyperinflation.

Inflation is the devaluation of a population’s purchasing power over time. All those stories from your grandparents about how they used to get a loaf of bread for a nickel are examples of inflation in action (and you didn’t even know your grandma was an economist.) Hyperinflation is an extreme situation in which inflation is out of control and could even exceed 10% per day! Can you imagine filling your tank up at the beginning of your week and all of a sudden you read that gas is now $8.00 per gallon for the cheap stuff? Hyperinflation causes a general unrest in society, chaos in the streets and eventually even the collapse of governments – imagine the Katrina aftermath in New Orleans occurring coast to coast.

Hyperinflation in Action

Take for example, the famous case of Argentina in 1989 which is summarized amazingly well in the article by John Mauldin titled Catching Argentinian Disease. Mauldin states that the hyperinflation was set off by years of budget deficits and borrowing to fund the government. In1989, no one would lend to Argentina Anymore. As the government still needed to pay its obligations somehow, they fell back on the printing press to keep the government going. As Argentina printed more money to fund itself, the value of the currency plummeted – more supply yields a lower price. Therefore the purchasing power of anyone using the Argentine Peso was demolished. This means that anyone with a savings account denominated in the Argentine Peso was also hurt and their savings were effectively cut down to a fraction of what they had been.

Hyperinflation is an extreme example of inflation, but it illustrates the effects of many years of inflation succinctly. I don’t think the United States is headed for hyperinflation or chaos in the streets necessarily. I do believe that the U.S. government might be expecting inflation to occure and even possibly welcoming it.

The White House Economists and A Hidden Agenda

Many of the White House economists hail from the University of Chicago. White House Chief Economist, Austan D. Goolsbee, has been a professor at UC since 1995. In my opinion, the University of Chicago is the best school for economics in the world and the faculty there is world class. So why is the White House position currently that they see no signs of inflation? Shouldn’t we take the word of the world’s best and brightest economists?

I believe that there is an agenda that the White House has yet to admit to. After all the bailouts which began with the Bush administration and continued with the Obama administration, our national debt has soared. I suspect that the only way to get that debt under control is to inflate it away.

You read above how bad inflation is for savings accounts and purchasing, but we didn’t discuss debt. Inflation works backwards and is actually a good thing for your debt load. Your 100k in credit card debt? Inflated away. Your school loans? Inflated away. The national debt? Inflated away. The amount of the debt doesn’t change (unless it’s indexed to inflation.) Could this be in the plans of the White House? Is this the reason Obama’s top economists don’t see inflation? No one can know for sure. It’s definitely an option.

What Do We Know?

I don’t believe in taking other people’s word for things. I don’t just accept as truths what top economists from the University of Chicago have to say about inflation. Often I get in over my head as the complexities of the many moving parts of some economic concepts are still beyond my understanding (though I will always work to understand them better.) Let’s look for some signs about inflation.

The Proctor & Gamble Quarterly Report

On January 27, 2010, Proctor & Gamble released their quarterly report. The results disappointed as the company indicated that rising commodity prices are squeezing the margins of the company. This means that they are paying more for the raw materials they buy to produce deodorant, detergent and everything else, but haven’t passed those costs on to the consumer. Thus their profit margins are lower.

I can tell you that P&G is a great company with competent and rational management. I can also tell you that competent and rational managers will find a way to eventually pass those input costs on to their consumer. The issue at P&G is that they are a premium brand company. They charge more for the perception that they offer a better product – bottom line is there are cheaper competitors. If P&G just raised their prices without a well thought out strategy, they would lose customers to the competitors. These higher prices will hit the customer eventually.

Research During Your Normal Routine

I noticed a few things just heading to Target and CVS for my day-to-day purchases. The price of my deodorant and hair products have all gone up. Sometimes these changes masquerade as a “multi-pack” or even smaller container at the usual price. Pay attention! Inflation is already here and you need to make moves to ensure your savings and your Investments are protected. Inflation risk is the largest current danger to your portfolio (unless you are that bad at picking stocks – then you might me the largest danger.)

Ways To Combat Inflation

Real Estate

Putting your cash in real estate is one way to combat inflation. The theory here is that real estate will increase in value and give you some protection against the eroding dollar. The rate for a 30 year mortgage is at near record lows and may be a good time to explore a vacation home or an investment home. Also, you need to have realistic expectations regarding your return and your holding period. Please refer to my article The Death of the Starter Home.


When you hear people say that you “should be in gold” they are referring to a proxy for gold and not a basement full of gold bars or coins from an infomercial. A good proxy for gold is the ETF “GLD.” The reason you don’t want to own the actual gold bars is that it may be impractical, there are security issues and they may be hard to sell or illiquid. Owning the ETF is very liquid as you can buy and sell them through your regular brokerage account.


Treasury Inflation Protected Securities or TIPS are bonds offered through the U.S. Treasury and are indexed to the official inflation rate. Therefore, over and above your normal return on the bond, these beauties actually adjust their price to keep up with inflation. Add tips to your portfolio with another ETF: “TIP.”

Commodities and Their Proxies and Other Common Stocks

Adding commodities to your portfolio will also help you keep up with inflation. I like to add proxies for commodities by buying common stocks whose business is energy, mining or farming. I don’t recommend buying or trading futures contracts for the actual commodities. I think a non-professional will get luckyor eaten alive playing that game. Common stocks in general are usually recommended in a portfolio to combat inflation. Though this method is often argued that the common stock is not effective here because companies cannot pass on their costs dollar for dollar to the consumer. I agree in the short-term, but in the long-term they will pass everything on and prices for the consumer will rise.

Inflation is real and it’s already here. Although we probably will not experience the chaos of hyperinflation like Argentina and many other countries across the globe, the erosion of your savings and your retirement accounts due to the inflation will occur. You will not be able to buy what you used to be able to buy for the same amount of money. It would be a shame to sacrifice and save your entire life just to watch your purchasing power evaporate right before your eyes. I am going to go buy more Proctor & Gamble now.