Inflation Insights: What Sets Today Apart from the 1980s and How to Thrive
Price hikes are frightening investors and consumers alike at a scale not seen since the era of stagflation in the 1980s. Rising gas prices, driven to new extremes as war blossoms again in Europe, and surging costs for consumer goods, propelled by pandemic-induced supply-chain disruptions, have created an inflationary economic environment and placed substantial stress on households across the country. Looking back 40 years to the '80s, we can take away several lessons for dealing with inflation and uncover some substantial differences between the economy then and now.
Inflation today is not the same as inflation in the 1980s
In 1979, inflation calculated from the consumer price index had risen to 7.7 percent, and by 1982 it had surged to almost 12 percent. The Federal Reserve aggressively raised interest rates to stem the economic hemorrhage. The Fed sought to restrict overall money supply and lending, hoping to ease poor economic outcomes by applying monetary levers and adjusting the institutional cost of money. Prices soared for everything from groceries to gas to housing.
Today, economists and journalists harken back to the '80s with warnings about what it's like to live in an inflationary environment, but inflation today isn't the same phenomenon as it was in 1982. Costs of rent have risen, as have costs in certain consumer categories, notably dairy. War in Europe has driven oil and gas prices to an all-time high as Russia becomes an international pariah. Today, however, costs of borrowing money remain staggeringly low, employment and wages are at a high watermark, and price increases have been driven primarily by supply-chain restrictions and an international gas crisis.
This means non-monetary levers are likely to ease the pain of inflation, including government efforts to increase employment, tap into material reserves of oil and dairy, and cooperate between Western governments to keep the international economy dynamic and stable. Today's Federal Reserve, led by Jerome Powell, is unlikely to raise borrowing rates to the startling levels seen in the '80s, thereby avoiding some of the most worrying effects of the stagflation era.
With luck, this period of inflation will be temporary. These four tips can help with weathering the storm.
Continue to plan and invest
Keep up with investments. Don't forget to save for retirement because times are hard right now. In fact, keeping money in the market is one of the best ways to beat the market in the long term. For large amounts of cash that might be needed at a moment's notice, like an emergency or rainy day fund, consider reallocating into money markets or TIPS, which will help reduce the costs of inflation and keep money accessible.
Get on a budget and trim unnecessary expenses
Not already on a budget? Now's the time! Budgets help keep spending in check as well as help uncover where money is going each month. One of the largest budget categories in a household is groceries. To drive down costs, consider switching to store-brand products, even if only in the short term, or experiment with a less expensive supermarket. Sacrificing quality in the short term can translate to substantial peace of mind.
Don't rush into large purchases
Thinking about getting a new TV or replacing the dishwasher? With rising prices, it may be tempting to purchase a new appliance to lock in a good deal, but it's best to hold off. Don't forget; deals and discounts won't go away even as prices rise. Waiting for the right time to make large purchases, like Labor Day for new cars or Cyber Monday for electronics, will remain the right strategy going forward. Avoiding hasty purchases and taking an extra moment to consider big-ticket items can lead to significant savings.
Carpool and use alternative transportation
Driving is expensive, especially in a dynamic environment where gas prices continue to fluctuate widely. In a city, consider biking or riding on public transportation. In the suburbs or the countryside, try arranging carpools with coworkers. Already carpooling or biking? Good! It's one of the easiest ways to protect oneself from one of the worst impacts of inflation: gas prices.
As the economy enters uncharted territory and inflation continues to rise, try these tips and strategies for managing the impact of inflation. The inflation of today is not what it was 40 years ago, and this means taking steps to improve personal finance and lifestyles can largely shelter individuals from the worst effects of inflation.
DISCLOSURE: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.