Inflation – Current Situation and How to Reduce Your Personal Rate

Inflation is all over the news right now, with the latest data showing a 7% year over year increase. In this article I examine the current inflation situation. How the stock market has performed during past inflation periods. And strategies to reduce your personal inflation rate.

Current Situation:

This chart shows the 1-year inflation rate for each month in 2021. Inflation skyrocketed from 1.4% in January to 7.04% in December. The long-term average is 3.23%. Inflation is calculated through measuring the change in Consumer Price Index (CPI).

source: US Inflation Rate (

Below are the components of CPI:

source: What Is the Consumer Price Index? (
Historical Analysis:

According to this research equities tend to perform ok during times of inflation. See the chart below for monthly returns during different inflation levels:

source: Myth-Busting: Equities Are an Inflation Hedge | CFA Institute Enterprising Investor

That’s not the full story though. The key point made in this article is that those are Nominal returns – before any inflation adjustment. After adjusting equity returns for inflation, the Real return is much lower:

Sector Performance During Inflation:

Fidelity’s research shows two sectors have a positive return relationship with increasing inflation – Energy and Utilities.

source: Fidelity | Inflation and sectors

Possible Strategies:

  • Tilt portfolios to these sectors or add satellite positions. Although, how do you know when to close out those satellite positions? In the 2010s, overweight Energy and Utilities and underweight Tech would have disappointed any investor.
  • Another perspective is to overweight the sector that has declined the most. The Nasdaq index (Technology) is down approximately 10% so far this year. There’s a timing issue with this strategy. How long will this sector decline and how deep? Is 10% the tip of iceberg or will it bounce back fast? These are questions no one can answer with certainty.
  • Or you can hold broad-based index funds that cover all the sectors. They are cap-weighted. The more a company appreciates, the larger percentage of the index it is. You will hold more in growing companies in relation to others. This weighting adjustment occurs quarterly for the S&P 500.

Your approach to investing during times of inflation is up to you. Those are a few ways to think about it.

Reduce Your Personal Inflation Rate:

How can we best position ourselves during high inflation? We may see decent nominal market returns. At the same time, we can attempt to reduce our personal inflation rate below the norm. Creating a personal finance arbitrage opportunity. Here’s a few options to consider:

  • Housing – the largest expense for most people. Will go up with inflation. If the timing is right for you to buy a house, based on your household balance sheet and income. Then now might be a good time before prices, interest rates (which the Fed will raise to fight inflation) and rents increase. Make sure you get a fixed interest rate!
  • Food
    • Cook more often
    • Cook in larger batches and freeze meals to reheat later
    • Use basic ingredients. Avoid super inflated food items (like bacon right now).
    • Experiment and try new foods that cost less
  • Transportation
    • With gas prices increasing, find ways to drive less
    • Maybe you’re already driving less by working from home? Continue this if you can.
    • Consolidate vehicles in your household. It’s expensive to maintain and insure extra vehicles.
    • Carpool when possible
  • Health – take care of yourself. Eat right, sleep enough, get outside, move. Improve your health to reduce expensive healthcare costs.
  • Bartering/Social network – consider trading goods or services. Others can do certain tasks or projects far more efficient than you and vice versa. Use this to your advantage. Barter or tap your social network to avoid inflated retail or service prices.
  • Invest in career growth
    • Invest in skills that are in-demand in your current field. Or consider changing to another field with better income prospects.
    • This is not the time to be complacent with your career. Status-quo cost of living increases won’t equal the inflation rate.
    • Leverage your improved skillset to command a higher income
    • Learn how to market yourself
    • Learn how to negotiate a higher income
  • Side hustle income – find something you enjoy doing and generate income from it. See Side Hustle Nation for some great ideas.

I hope some of these ideas help you consider how to reduce your personal inflation rate. Time will tell how bad this cycle of inflation is, but it’s something we should all pay attention to.

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