FA Playbook

Here are some tips for beating inflation as prices start to rise

Key Points
  • Prices are going up, but that doesn't mean you are worse off.
  • From reducing your expenses to rethinking your investments, there are ways to protect yourself from inflation.
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Why everyone is so obsessed with inflation

Anyone buying a new car, or even a cup of coffee, has noticed that prices are going up. 

Last month, inflation accelerated at its fastest pace in about 13 years as the economic recovery gained steam, the Labor Department said. Year over year, prices increased 5.3%

Meanwhile, median household income fell 2.9% during the pandemic, the first significant decline in nearly a decade, according to new data from the U.S. Census Bureau.

However, there are ways to combat inflation even without a pay increase. Here are three places to start: 

Negotiate lower prices on everyday expenses

To counteract higher prices, you can negotiate a better deal on almost anything, according to Andres Lares, managing partner at Shapiro Negotiations Institute in Baltimore.

Start by building a rapport, then ask if there are any programs or discounts you qualify for, Lares advised. "There is no harm in asking."

Streaming services, insurance premiums, cable bills, cell phone plans and gym memberships — especially now — are classic examples of recurring costs that are often negotiable, and so is the APR on your credit card.

Consumers who call and ask for a lower rate are almost always successful, studies show, and that can be a great tool for reducing monthly expenses.

If you find the lender or seller isn't willing to come down in price, consider other options.

Lares said: "If it is a new or used car, can the dealership throw in free oil changes for a year? If it is lodging, can they upgrade you to a better view?"

"Don't always just think discount," Lares added.

Getting more for your money is a good way to add value at the same price.

Postpone big-ticket purchases

Not everything will always be more expensive. Some price hikes could be temporary, and, in that case, it may pay to hold out.

"You can defer purchases that are not immediately necessary," said Neil Gilfedder, a senior vice president of portfolio management at Edelman Financial Engines.

For example, used car and truck prices, which had been a major contributor to inflation gains, are up 31.9% year over year but are starting to retreat, slipping 1.5% in August. 

The chip shortage which helped drive up prices is expected to alleviate in the months ahead and cars generally become less expensive toward the end of the year and into January, when dealers look to unload last year's models.  

Similarly, sky-high demand for home improvements coupled with supply-chain slowdowns caused some building supplies, including lumber, steel, gypsum and copper, to hit record highs this year.

But remodels may become more affordable soon, too, as demand for raw materials cools in the winter months.

"Wait it out until it's possibly cheaper in the future," Gilfedder said.

If you must buy something that suddenly costs more, that's a more difficult situation, he added. "This is an example of when an emergency fund can come in."

Any extra savings will shield you from having to rely on credit cards or other types of high-interest debt.

Diversify your investments

To maintain your purchasing power over the longer term, determine the right assets for your investments, considering your income, expenses, risk tolerance and time horizon.

If inflation is above what you're earning in Treasurys, that part of your portfolio loses buying power. But, there are other options that make up for it.

For example, consider a mix of commoditiesTreasury inflation-protected securities and equities to offer some security.

"Over very long periods of time, it is likely that a properly diversified portfolio which includes equities, real estate, and TIPs can provide the needed return to combat inflation," said Dan Keady, chief financial planning strategist at TIAA.

"Stay with diversification and rebalance back to your target portfolio at least yearly rather than trying to time short-term movements," he advised. 

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More diversified portfolio needed to hedge against inflation tail risks: Invesco