# How to protect yourself against inflation.



## emperor (Jul 24, 2011)

I have this weird feeling the powers that be are trying their hardest to create inflation, I think like everything else they will get it wrong and we will get run away inflation. 

I actually think this will happen to the USA, if that's the case will we be okay in Canada?
What would be the best low - medium - high risk way to capitalize on high inflation in the States? 

I know people won't know 100% for sure, I'm just getting opinions. Is there any precedence for this, has it happened before?


----------



## wendi1 (Oct 2, 2013)

Really high inflation ruins everything - all you can really do is try to get your money out of the country. 

For moderately high inflation, own stuff rather than dollars. Spend the bucks as soon as you get them. Forget about interest bearing anything (unless interest rates also climb).

The "powers that be" like a little bit of inflation - otherwise jam tomorrow sells for the same price as jam today, and spending slows, and the economy grinds to a halt.

If the US gets runaway inflation, we will not be okay, and it has happened before.http://en.wikipedia.org/wiki/File:US_Inflation.png

Look, this is a big, complicated subject. The Wikipedia entry on inflation is a pretty good start, if you don't want to read any books, or take any courses.


----------



## Taraz (Nov 24, 2013)

For moderate inflation, buy stocks, houses, or commodities. For hyperinflation (which I doubt we will have anytime soon), get your money into another currency, in another country.


----------



## GoldStone (Mar 6, 2011)

emperor said:


> I have this weird feeling the powers that be are trying their hardest to create inflation


Yes, because they are scared of deflation.

Aging population is deflationary. 
Consumer/government deleveraging is deflationary.
High unemployment (Europe) or underemployment (NA) is deflationary.
Shift of consumption from material goods to digital goods is deflationary.
...

+1 to what Wendi said. It's a big, complicated subject.


----------



## Taraz (Nov 24, 2013)

Self-driving cars will be massively deflationary. (Although it won't be bad for everyone.)


----------



## richard (Jun 20, 2013)

wendi1 said:


> The "powers that be" like a little bit of inflation - otherwise jam tomorrow sells for the same price as jam today, and spending slows, and the economy grinds to a halt.


Funnily enough, I have never in my life bought jam because the price would be higher a year from now (although had I known the little Italian deli nearby would stop selling 100oz cans of imported tomatoes for $5 I would have stocked up last year - only because the price has more than doubled since then). At the same time many things, especially technology get cheaper and the market for them grows as the cost goes down. So for most things the government can't directly control prices unless they want to go back to the 50s and falling prices are good.

Two areas where deflation has very powerful effects, both economic and psychological, are debts and wages. House prices are another case since falling house prices lock homeowners into the house they live in. Strangely we manage inflation in the things that are hardest to control while ignoring the effect this has on some of the areas where it is most harmful.


----------



## alingva (Aug 17, 2013)

emperor said:


> I have this weird feeling the powers that be are trying their hardest to create inflation, I think like everything else they will get it wrong and we will get run away inflation.
> 
> I actually think this will happen to the USA, if that's the case will we be okay in Canada?
> What would be the best low - medium - high risk way to capitalize on high inflation in the States?
> ...


Unfortunately inflation does not spread everywhere in the same rate. Inflation is increase of money supply and banks are guilty of that. However banks do not move money around, people do. Now we have unbelievable inflation in real estate which is called bubble. We have inflation in insurance industry (prices increase 10-20% per year), stock market, bond market, collectibles and other assets. We still do not have inflation in food prices, clothes, or electronics however I have been noticing huge increase in price of fish and meat (up to 30% in the last 3-4 months). Is it because of bad weather in USA/Canada? It might be but I do not think so. Inflation will come, just some prices will go up 40% and some only 3%


----------



## MoreMiles (Apr 20, 2011)

If a $6 coffee in Starbucks or $5 Big Mac is not food inflation, I am not sure what it is called? It used to be you can get a good combo with $5 at McD.. now you need $10, if you need drink, fries, and snacks. 

Also have you seen the price of groceries lately? It costs about $1 per apple or orange these days. People don't blink an eye to shop $100 for their grocery trip. It used to be $100 can feed you an entire month.


----------



## Rusty O'Toole (Feb 1, 2012)

emperor said:


> I have this weird feeling the powers that be are trying their hardest to create inflation, I think like everything else they will get it wrong and we will get run away inflation.
> 
> I actually think this will happen to the USA, if that's the case will we be okay in Canada?
> What would be the best low - medium - high risk way to capitalize on high inflation in the States?
> ...


It's not weird at all. Inflation is an orthodox Keynesian policy tool. Inflation is the standard policy everywhere in the world and has been since the thirties. Every government in the world has an inflation target, usually 2%, sometimes higher. If it ever drops to 0 they freak out. If it gets over 12% they start to think about doing something about it, some day. In some countries inflation has gone over 100% a year.

Inflation is more insidious than people realize because of its compounding nature. 2% doesn't sound like much but it adds up. You only realize how bad it is as you get older.

I'm 63 so I have clear memories of buying a bottle of pop and a bag of chips for 25 cents and getting a nickel change. A new Chevrolet cost $1800, a Cadillac $5000. A house cost $5000 or, if you bought a brand new 3 bedroom split level in the suburbs, $20,000.

The value of a dollar is now about 3 cents by that standard. In other words, the government has stolen 97 cents out of every dollar by stealth in my lifetime and not one person in 1000 noticed.

They have changed the method of calculating inflation several times over the years. If they still used the same formula they used in the 1980s, today's inflation rate would be 10% or 12% not 2% to 3%.

You can make money out of this racket by using leverage. Today you can borrow money at 3% or 4% and buy a house or other assets that will increase in value with inflation while the money you borrowed goes down in value. So you benefit from inflation while the savers of the world get taken to the cleaners.

There are other investments that go up with inflation, or faster. But that is another subject.


----------



## Nemo2 (Mar 1, 2012)

MoreMiles said:


> People don't blink an eye to shop $100 for their grocery trip. It used to be $100 can feed you an entire month.


I lived with a bunch of guys in Toronto in the mid 1960s......two of us would walk to the nearby Power supermarket, (subsequently taken over by Loblaw), and struggle back with the numerous heavy grocery bags we filled for $20...........but then we weren't making diddly wage-wise.


----------



## Rusty O'Toole (Feb 1, 2012)

Inflation is not new. I knew an old timer in the 1980s, who had a Henderson motorcycle and sidecar he had owned since the 1930s. He told me that when he bought it, he could take his wife grocery shopping in the sidecar, buy $3 worth of groceries, and she had to ride home on the back of the motorcycle because the sidecar was full.

By the 1980s she could put $3 worth of groceries in her purse.


----------



## Rusty O'Toole (Feb 1, 2012)

In the early sixties when I went grocery shopping with my parents, $20 bought enough groceries to fill the trunk of a car and feed a family of 5 for a week. We ate well too, and in those days every meal was at home, nobody went to a restaurant.


----------



## My Own Advisor (Sep 24, 2012)

MoreMiles said:


> If a $6 coffee in Starbucks or $5 Big Mac is not food inflation, I am not sure what it is called? It used to be you can get a good combo with $5 at McD.. now you need $10, if you need drink, fries, and snacks.
> 
> Also have you seen the price of groceries lately? It costs about $1 per apple or orange these days. People don't blink an eye to shop $100 for their grocery trip. It used to be $100 can feed you an entire month.


I hear ya. Prepackaged crap remains cheap but it's not food. Eating well now costs good money.


----------



## kcowan (Jul 1, 2010)

I remember seeing charts of how long the average worker had to work for various items. ISTR that cars and houses were the major items that took more hours. Most grocery items were comparable or less.


----------



## OnlyMyOpinion (Sep 1, 2013)

*How to protect yourself..* 
We can't control many of the issues discussed, so we just try to 'stay the course' - growth equities when younger and building assets, with a good measure of dividends and fixed income - then weighted to dividend payers in the retirement income phase, still with a good measure of fixed income.
We'll see no pay raise at work, but so far this year our 'other income' has given us dividend raises keeping us ahead of inflation: THI 23%, CVE 10%, TD 9% , RY 6%, BCE 6%, TRP 4%, BEI 3%, etc.


----------



## Taraz (Nov 24, 2013)

OnlyMyOpinion said:


> We'll see no pay raise at work, but so far this year our 'other income' has given us dividend raises keeping us ahead of inflation: THI 23%, CVE 10%, TD 9% , RY 6%, BCE 6%, TRP 4%, BEI 3%, etc.


Yes, for normal inflation, equities are your best bet. Not only do most companies make more when inflation occurs (because their good sell for more), they (should) make money even when adjusting for inflation (assuming their business model is sound). That's why things like gold and real estate generally don't perform as well as the stock market over the long term.


----------



## rikk (May 28, 2012)

emperor said:


> I have this weird feeling the powers that be are trying their hardest to create inflation, I think like everything else they will get it wrong and we will get run away inflation.


I find that interesting, puts a different light on things ... out of curiosity, if the cpi is ... "In Canada, the most important categories in the CPI basket are Shelter (27.5 percent of the total weight) and Transportation (19.3 percent). Food accounts for 16.1 percent; Household Operations, Furnishings and Equipment for 11.8 percent; Recreation, Education and Reading for 11.8 percent; Clothing and Footwear for 5.7 percent; Health and Personal Care for 5 percent; Alcoholic Beverages and Tobacco Products for the remaining 3 percent" ... and when something like e.g. hydro (under shelter I guess) as an example is expected to go up by 40% over the next while, you are suggesting that the "powers that be" ("the government"), not only has no problem with such increases, but may even condone such increases, as it suits the need for inflation ...


----------



## andrewf (Mar 1, 2010)

emperor, it's not a secret plot. The Bank of Canada is mandated with keeping core CPI inflation at 2%. If inflation falls below that they will loosen monetary policy to 'create' inflation.

It's possible that they may overshoot in the short run, but CBs have demonstrated in the past that they can and will tighten past the point of pain to keep inflation in check. Thus inflation expectations are well-anchored around 2%, and expectations drive realized inflation.


----------



## Rusty O'Toole (Feb 1, 2012)

It's not a secret when they put it on the front page of the financial section lol.


----------



## OurBigFatWallet (Jan 20, 2014)

OnlyMyOpinion said:


> *How to protect yourself..*
> We can't control many of the issues discussed, so we just try to 'stay the course' - growth equities when younger and building assets, with a good measure of dividends and fixed income - then weighted to dividend payers in the retirement income phase, still with a good measure of fixed income.
> We'll see no pay raise at work, but so far this year our 'other income' has given us dividend raises keeping us ahead of inflation: THI 23%, CVE 10%, TD 9% , RY 6%, BCE 6%, TRP 4%, BEI 3%, etc.


This is part of my strategy. Buying dividend stocks that continually raise their dividends is one way to fight inflation on retirement


----------



## emperor (Jul 24, 2011)

@andrewf So the banks meddle to get it to 2% but after years of hearing about deflation they still haven't figure out? So pretty much they have no control or no clue? So what would be a good stock to invest in? Would banks do good with run away inflation or would mining stocks be better?


----------



## birdman (Feb 12, 2013)

I believe the CB's have have the necessary tools to prevent runaway inflation using their main tool of increasing interest rates. I was well involved in the financial services industry during the early 80's when inflation was rampant and annual pay increases were 10% plus, housing and other prices were rising beyond belief. It was the norm for individuals to finance the purchase of a new home by leveraging both their existing home and the new one and then selling their current one for $50,000. more 6 mos later. Easy money. Well, the government stopped that very, very quickly by increasing interest rates with the Banks prime rate hitting a high of 22.75%. That stopped inflation in it tracks. Property values seemed to drop overnight and the poor person that leveraged both houses to the max lost them both and went bankrupt. Similarly, those who leveraged themselves to invest in the market got hammered as well as they were paying 20% interest and receiving only small dividends. The banks were hit hard on their bottom line and lost money, however, they still paid their divy. Yes, jobs were lost, unemployment increased, but inflation eased. Because of this I really don't worry too much about runaway inflation. However, on the other hand its what you don't know (the long term impact of the USA's, GB's, Canada's, etc debt) that causes me some concern as its difficult to control what you don't know. I also worry about deflation as I have never experienced it. 
As an aside, when we experienced government induced inflation interest rates on deposits increased proportionately and if I recall correctly term deposit rates hit a high of 17% which certainly beat dividends- wish I had the cash to invest in a 10 yr bond at the time. 
So, in my opinion I recommend diversification including stocks, property, gold, cash, GIC's or bonds, etc. Remember its what we don't know that will bite us.


----------



## GoldStone (Mar 6, 2011)

emperor said:


> So the banks meddle to get it to 2% but after years of hearing about deflation they still haven't figure out? So pretty much they have no control or no clue?


We are not experiencing an outright deflation like they did in Japan. You can thank "the banks" for that. We avoided a double-dip recession in 2010-2012. You can thank "the banks" for that too.


----------



## andrewf (Mar 1, 2010)

The BoC has done a great job of achieving their mandate. Their mandate is not to cause economic booms, it is to maintain low predictable levels of inflation.


----------



## savvybuck (Feb 12, 2014)

Hey I believe a relevant article is this:
http://savvybuck.com/2014/01/31/investments-and-inflation/


Although stocks are expected to beat inflation over a long period of time, they do not directly correlate with inflation.

Meaning, if inflation rate were to spike to 12%, do not expect your stock portfolio to gain at least 12%. In fact, your portfolio could very well drop 20% during high inflation times as shown in my data.

Case in point: In 1974, S&P had a return of -26.47%

Inflation was 11%

So your real return was actually: -37.47%


----------



## richard (Jun 20, 2013)

Here's a great explanation of inflation: http://www.johnkay.com/2014/03/05/the-startling-human-progress-that-economists-fail-to-see

The key part:



> While the prices of wood, candle wax, gas and electricity have tended to increase, the price of light has fallen. Our statistics not only fail to reflect the trend, they mistake the direction.


So central banks can get their inflation even while we spend less to get what we want. The old air conditioner/dishwasher test shows this just as easily.


----------



## Nemo2 (Mar 1, 2012)

^ Good article. :encouragement:


----------



## kcowan (Jul 1, 2010)

Nemo2 said:


> ^ Good article. :encouragement:


It is thought-provoking for sure. I am hard-pressed to come up with many real examples. I suppose this is partly because the segment of society most impacted by inflation might gain the least from quantum improvements?


----------

