If you have been shopping lately or following the financial headlines, the story of the day continues to be the inflationary pressures on the U.S. economy. November’s inflation increase, known as “Headline CPI” came in at 6.9% year-over-year, which is the highest reading since 1982. Supply and demand pressures, consumer spending, and a job environment where there are more jobs available than workers to fill them are all factors contributing to this inflationary environment. Of course, there is a convincing argument that government stimulus and the Federal Reserve’s intervention in the economy are also driving costs higher.

The two areas the U.S. consumer is noticing the most inflationary pressure are food costs, which are up 6.1% year-over-year, and energy costs, which are up 33.5% year-over-year. Again, a myriad of factors is contributing to these extreme price increases, but the bottom line is that our dollars are not going as far as they did last year.

So, what can you do about inflation?

As with most of the advice we give at Master’s, the answer to this question points to fundamental financial principles that we ascribe to:

• Operate with margin – The more margin you have in your financial situation, the easier it will be to absorb the costs of inflation without disrupting your financial goals.
• Use a prudent debt strategy – Many pundits are advocating taking on additional leverage in this low-interest environment so your debt service costs are fixed to current rates for the long-term (low interest rates may or may not last much longer), which can be a prudent strategy. However, over-leverage could lead to a ‘whipsaw’ affect if a period of higher inflation leads to a downturn in the economy, and thus reduces your cash flow available for debt service.
• Know What You Own – From an investment standpoint, make sure you understand what types of investments you own. One of the challenges of investing in mutual funds and ETFs is that it might take some effort to get a clear picture of what you really own. If inflation causes a slowdown in the economy, you want to be confident that your investments will behave in the manner they were designed to. Our portfolios at Master’s are currently focused on ‘quality’ investments. We have decided it is important now to own assets that have a better probability of weathering the storm if the water gets choppy.

As with any market or economic event, our final principal is to stay focused on your personal financial goals. Do not be swayed by the latest article or talking head’s predictions, but instead stay focused on the activities that will keep you aligned with your desired future.

How can we help you stay aligned with your goals during this time?