I’m fortunate to belong to a group of Falcon business people that meets every Friday morning at LaMission. Recently, the group’s education coordinator, Tracy Watkins of Inspired Studios, reminded us of Sam Ewing’s great quote about the cost of living: “Inflation is when you pay fifteen dollars for the ten dollar haircut you used to get for five dollars when you had hair.” It’s been so long since inflation has been a real issue outside of housing prices in the U.S. that folks’ humor about it has been just that – humorous.Recently, inflation – and what to do about it – has moved out of the shadows of late night gold-bug ads and financial advisors’ retirement seminars into the aisles of Wal-Mart, Safeway and Home Depot. Talk at groups like our Friday morning networking meeting and the chamber of commerce has gone from what will happen “when” inflation hits to “did you catch last night’s “Extreme Couponing” on TLC?”What exactly is inflation? Price inflation, the version we care about, is a rise in the general level of goods and services in an economy over time. Therefore, inflation also is a decline in the purchasing power of the individual unit of currency used in the economy – the U.S. dollar, in our case. Economists try to look at wages and economic growth in terms of level purchasing power. If a basket of groceries goes up in price 1 percent in a year but you’re making 2 percent more per year, then the purchasing power of your hours of labor has gone up by more than the price level by 1 percent. But if the basket has gone up 5 percent and you got the same 2 percent raise, then you actually took a 3 percent pay cut in purchasing power.What makes these price levels go up in the first place? More often than not, it’s more dollars chasing the same number of – or fewer – goods and services. This is why you hear pundits lament the “printing of money” to pay for the government project du jour. In many cases, increasing the money supply leads to inflation because all those additional printed dollars are out there available to buy things, but there aren’t any more things to buy.There are two main ways in which you can control your exposure to inflation: as a consumer now, and as a saver and investor for the future. As a consumer, there are immediate actions you can take to become a savvy shopper and avoid paying the categories that are currently most affected by price increases. As an investor, there are steps you can implement to ensure that you grow purchasing power, not just the number on your statement.Consumer price inflation is most evident right now in gasoline, food staples and many paper products.Gasoline: Make sure your tires are inflated to the car’s recommended pressure, if not between that and the tire-wall pressure. Remove any extra weight from the car since you need to spend gas to get the extra weight up to speed. Look for additional tips at http://cleanmpg.com.Food and paper products: Many retailers and food manufacturers have recently announced that they will be raising prices by as much as 10-15 percent. However, in order to appease shoppers, stores have simultaneously announced price matching programs, improved coupon programs or more advanced loyalty programs. Their assumption is that most shoppers will not take full advantage. Your opportunity is to prove them wrong. Take the time to read the price match or loyalty program policies at your favorite store, and take the extra very small amount of time to make full use of it. The extra savings offered by these new programs can far exceed the overall increase in recent inflation.Investment inflation protection comes down to diversifying currency risk and purchasing power risk.Currency risk: When one country has more inflation than others, their currency is said to be devalued compared to other currencies. Individual investors have the opportunity to invest in foreign stocks, bonds and currencies. If those currencies go up in value compared to the U.S. dollar, then when you sell those foreign investments you will have gained more purchasing power than someone who invested in stocks and bonds based only in the U.S. The concern is that the opposite is also true. If the country you chose has greater inflation than the U.S., then you will lose purchasing power compared to a domestic investor. Therefore, diversification among countries, regions and sectors is key. The age of one “International Fund” in a 401k is long over.Purchasing power risk: The other inflation concerns in your portfolio are CDs, bonds and cash. Holding fixed-interest-rate savings leaves you open to the risk that the inflation rate will be higher than the interest rate you are earning on the cash. If you earn 2 percent interest per year on a CD, but inflation is 4 percent, you are able to purchase 2 percent LESS next year than you could this year. These investments can include bond funds, the “G-Fund” in the TSP and savings accounts.Once you have determined how much of a balance of foreign vs. domestic, equity vs. bonds you want in your portfolio to grow purchasing power for your goals; it is important to rebalance your portfolio regularly so you don’t let your more volatile investments become too large a part of your account.You don’t have much control over what the Federal Reserve and the Treasury Department do about the money supply and foreign exchange rates. You do control how you react to their actions and prepare for the future. And when the “ten dollar haircut” costs 30 bucks in a couple years, you’ll be ready for it.Jason Gray owns GoalView Advisors, a registered investment advisory firm in Falcon. He is a Falcon resident and serves as chairman of the board for the Eastern Plains Chamber of Commerce. He can be reached at 719-439-2054 or jason.gray@goalviewadvisors.com.
