How to Hedge Inflation at Home
The U.S. inflation rate was already approaching 8%, and then came war between Russia and Ukraine—two countries that generate a large share of agricultural commodities and energy that are consumed throughout the world.
The Federal Reserve hopes that raising interest rates will help moderate inflation, but that remains to be seen. In the meantime, seeking out higher-returning, lower-risk investments, and reviewing your budget (or creating one) are a few ways to mitigate the pain of inflation.
Series I Savings Bonds
What is an I bond?
An I bond is a type of U.S. savings bond that can protect the purchasing power of your cash from inflation. Interest rates are adjusted to keep up with rising prices.
How much interest does an I bond earn?
Interest on I bonds uses a composite rate formula—a combination of a fixed interest rate that lasts for 30 years, and an inflation-adjusted rate that is set twice a year. For bonds issued from November 2021 through April 2022, the combined rate is 7.12%.
Is an I bond taxable? How much can I buy?
Series I bonds are exempt from state and local income taxes, but they are subject to federal income tax. The maximum purchase per calendar year is $10,000. More information is available at
https:// www.treasurydirect.gov/indiv/myaccount/myaccount_treasurydirect.htm.
30-year Fixed-rate Mortgage
The combination of rising home prices and low mortgage rates has made the housing sector a great inflationary hedge for many Americans. And while this month has seen the rate for a 30-year fixed mortgage move above 5% for the first time in a decade, today’s rates are still below average from a historical perspective. And if you bought or refinanced in the last few years, your rate is probably below 4%.
Think of it like this: with debt, it’s your liability that loses value over time and that’s a good thing. You’ve leveraged the bank’s money and now have a fixed payment for 30 years. At 8% inflation over the past year, last year’s $1,450 mortgage payment technically would be worth more like $1,335.
Get Creative with Budgeting
As you look at expenses, can you swap out comparable products or services? The ability to pivot to a cheaper option could help your bottom line. I’ve noticed a gradual increase in delivery fees for services such as Uber Eats and DoorDash. Maybe that $20 upcharge for DoorDash isn’t worth it anymore, and you pick up the pizza instead of having it delivered. Or maybe you skip going out to eat 1 or 2 nights of the month, to offset higher utility bills.
Saving money should always be a priority for you and your family’s financial future, but when prices are rising across the board, it becomes increasingly harder to do so. While these suggestions can help, a prolonged period of high inflation could put a serious damper on household spending. However, one item has remained at the same price point since inception: the Costco hotdog and drink for $1.50. So maybe dining at Costco is the best hedge against inflation?
— Brant Jones, CFP®