There is already massive monetary inflation.  The Federal Reserve’s balance sheet continues to increase.  It is now close to $7 trillion.  It’s up about 60% from where it was two months ago.

The bigger question is whether this will translate into massive price inflation for consumer products.  An even bigger question is what we can do to protect ourselves from massive price inflation.

One thing I am absolutely certain of is that real wages are going down.  If nominal wages return to about where they were in February, then I expect overall prices to go up.  Overall prices are going to go higher than wages.  It’s possible that wages will go down while prices will go up.

Price inflation is not uniform.  Some prices will go up more than others.  Some prices will go down.  Some products or brands could become nonexistent.

The harmfulness of price inflation will not be uniform.  While most everyone buys food, everyone’s consumption habits are different.  Some people buy new clothes every month.  Some people are wearing clothes that are five years old.  Some people drive a lot, although this is less so these days.  Some people buy food at restaurants, while others always cook at home.  People are in different stages of life.  Someone who just had a baby is probably buying a lot of diapers.  Someone who just retired may be downsizing in terms of house size.

Even for consumers of food, which is almost everyone, there are varying tastes.  Some people buy a lot of fruits and vegetables. Some people eat a lot of meat. Some people shop for packaged foods that are more processed.  Not all food prices go up equally.  Maybe the price of lobster will go down because it is more of a luxury item. Then again, if people decide to not go to restaurants, maybe lobster will be a nice treat at home and demand will go up.  It’s hard to say.

The key takeaway is that prices are not uniform.  People will be impacted in different ways.  We can see the variations looking just at the latest CPI numbers.  In the month of April, the CPI fell by 0.8%.  The median CPI was up 0.1%.  But according to this CNBC article, grocery prices were up 2.6% just in the month of April.  At this pace, food prices would be doubling every couple of years.

Protecting Wealth and Protecting Income

It is very difficult to protect yourself from the impacts of high price inflation.  In fact, it is virtually impossible.  I would argue that it is easier to protect your wealth from inflation than it is to protect your income.  But most people rely on their income more than their wealth.

I don’t think Jeff Bezos is worried about the impacts of inflation.  Even if prices started to double every year, it would be a rounding error in his bank account.  It could hurt his business, but I don’t think it will have a major impact on his standard of living.

Let’s take an example of someone who makes a middle class salary of $75,000 per year.  This person has $50,000 in savings outside of any retirement accounts and not including home equity.

This person’s main concern is not protecting the $50,000.  The primary concern is the income side.  What happens if his company gives no raise next year but his cost of living goes up by 10%?  This is a significant drop in this person’s standard of living, assuming he was spending most of what he earned.  If the same thing happens again the following year, this will really be significant.  Of course, it will be more significant for those who don’t have a job.

Now take someone who makes $50,000 per year but has $500,000 in financial assets.  He was planning to retire soon.  Hopefully that plan has changed or he has a plan for generating some kind of passive income other than the stock market. This person’s focus should be just as much (or more) on protecting his wealth as compared to his income.

Most Americans would be closer to the first example than the second.  Most people don’t have significant savings, especially outside of retirement accounts and home equity.  The retirement accounts don’t do a lot of good unless you can actually access the money.

If someone is retired and has a million dollars or more, then that person is in seemingly good shape.  Wealth protection is the number one financial priority.  This person can protect against rising prices by investing in inflation hedges. Gold is the most obvious one, but having a diversified portfolio that includes investments tied to hard assets can go a long way to protecting wealth.  But how many people know this?  How many people with a million dollar or more net worth has more than 5% invested in gold or gold-related investments?

Generally speaking, I think people in their prime working years are better off than most right now. They are even better off if they have no debt and substantial savings, but the key part is that they are able to work and able to be productive enough to make a decent salary.

Wages are going to lag behind the rising prices of consumer products.  This means that almost everyone will suffer a decline in living standards.  But at least someone who is 40 years old and productive can keep making income.

I don’t know what retirees will do.  They will get their Social Security checks, which are supposedly adjusted for inflation.  These checks will not keep up with inflation.  People with fixed-income pensions will find that they are able to buy less and less with the money.

Someone on Social Security and a fixed pension can’t catch up to the rising prices.  When you are working and making money, you can ideally eventually catch up to the higher prices with a higher income.

Some people will be better off than others.  More accurately, some people will be less worse off than others.

Most people are going to suffer.  We don’t know how long this will last.  If the Fed keeps creating new money out of thin air to monetize the government’s debt, then this could last a long while.

This is bad news. Most people don’t understand the economics.  Some understand the concept that there is no free lunch.  They intuitively understand that checks from the government are going to have some bad consequences.

Worse, people don’t know how to protect themselves.  In some ways, there isn’t a lot to do except to be productive in your job and hope that your salary is maintained.

A Strategy

There is something that you can do to help a little.  If you have significant wealth, I already mentioned investing in gold and gold-related investments.  I advocate a permanent portfolio, or something similar, which would include a substantial portion (25%) of your investments going towards gold-related investments.

When price inflation is a big threat, the problem is that your money is continually being devalued. It sits in your checking account (or wherever) and it won’t buy as much as the day before.

Therefore, I recommend buying things that you know you will need in the future that can be bought now.  You can’t buy a lot of food for the longer-term future.  Some people have freezers where they store meat and other foods.  But you can only take this so far.

You can buy toilet paper, if you can find it.  You can buy paper towels.  This does take up space, but it may be worth it if you can find an extra closet to load up on goods.

Think through your daily life.  What do you use? This isn’t going to be huge savings, but you can at least buy one or two items ahead on everything if it doesn’t expire quickly.  I am thinking of things like shampoo, laundry detergent, dish soap, razor blades, etc.  These are things you will use.  Do you think any of these items will actually be cheaper in one year than they are today?  I don’t.  Therefore, there isn’t much to lose with this strategy.

A bonus to this strategy is that it is a little bit of preparedness.  We saw in March how quickly shortages of certain items can happen.  Back in January, who would have thought that the toilet paper shelves would be empty?

Now move to some bigger things.  While I don’t recommend paying a lot for a car, I would imagine that there are some good deals out there if you really need something.  If you are any good at negotiating, I have to imagine that you can get a better price on a car in May 2020 than you could have in February 2020.  It is hard to say where car prices will be in 2021.  On the one hand, demand will be way down.  On the other hand, if the raw materials used to make cars go up in price, this could help drive prices higher.  Fewer cars will be produced as sales have obviously declined. So it is hard to say what car prices will be like next year and the following year.

There are other things where I believe prices will eventually go higher.  If you own a house, I’m sure you have things you already wanted to do.  I am not recommending you buy new granite countertops for your kitchen because they will look nice.  This is something you probably just shouldn’t do right now unless you are really well off.

There are things that would be considered as necessities.  If you know you will need a new roof in the near future, maybe you should shop around now to see if you can get a good deal.  If it would cost $15,000 today, maybe it is worth paying the price now instead of waiting until it costs $20,000.

What about your air conditioning unit?  If it is on its last legs, maybe it is better to get a quote now.  If prices will be double in a couple of years, it would be better to replace it now.  Of course, we don’t know that, but it is worth considering.

I don’t think you should force anything.  If what you have works perfectly well and is likely to last for many years to come, then don’t replace it.  But you can often see the writing on the wall with certain things.  You may have an appliance on its last legs. You can shop for deals now. It doesn’t mean you have to buy right now.  Just get a few quotes and make a decision.

The smaller items like dish soap and razor blades are almost a sure thing.  You won’t be wasting money by buying them now.  It is harder with the larger and more expensive things.  However, you can also potentially save many thousands of dollars if we eventually get the significant price inflation that is likely.

Air conditioning units are not likely to go down in demand much.  On the margin, there may be a few people who just decide to get a cheap window unit.  But most people are going to get their central air conditioning unit replaced if they need to.

Again, this isn’t going to fully protect you against the horrible effects of massive price inflation, if it comes.  But you can take action in some areas where it will help alleviate the difficulties.

If you have any suggestions on how to protect against inflation, please comment below or send me an email.