Coping with Inflation

(WSJ illustration)

The WSJ publishes 15 Ways Consumers Can Deal With—and Even Benefit From—Rising Inflation. Below are my comments in italics:

What’s your inflation rate?

In the CPI-U [consumer-price index for all urban consumers], motor fuel represents approximately 5% of assumed total household spending and is up 44% from April 2021 to April 2022. Used cars and trucks represent approximately 4% of the total and are up 22.7% over the same period. So if you can hold off on buying a new car, for instance, you can feel less of a sting from those big increases.

My personal inflation rate is lower than the average because the largest expenditures (mortgage and car payments) are fixed. Variable components have a discretionary element, e.g., chicken can be substituted for beef, and we can dine out two days a week instead of three. So we're lucky--we certainly feel the inflation, but the non-inflatable part of our budget is high, and we are willing to substitute lower-priced items in most cases.

Be aware of shrinkflation

Product companies will slowly “shrink” the contents of the packages and goods you buy while charging you the same price. This means a price hike for you. The package of strawberries now has five fewer strawberries. The bag of chips has more air and less chips than usual. The roll of toilet paper went from 264 sheets to 244 sheets...

One way to deal with shrinkflation is to try to stick with generic store brands because those tend to be the last to shrink...It also helps to only buy fruits and vegetables that are in season.

Perhaps there's brainwashing involved, but about half the time I don't find generics to be as good or effective as branded products, so that suggestion doesn't work for me.

Instead, my problem is kind of the opposite but is an opportunity to save money: don't buy more than you're going to use before it spoils. I buy too-large packages of perishable items, for example, two loaves of bread for $7.50 instead of one for $5, then have to throw out the second because of mold. Switching to smaller-size packages raises the per-item cost, of course, but the overall expense is lower.

Delay Social Security

Every year that Social Security benefits are delayed past full retirement age, the amount of the eventual benefit increases by 8%.

Thus, an individual with a full-retirement-age benefit at 67 years of $1,000 a month could increase their benefit to as much as $1,240 by delaying to age 70—an increase of as much as 24%. And the annual CPI increase is based on this higher amount.

My health is good but not great, and there's a good chance I will make it to 90. However, there are many personal friends, relatives, and acquaintances my age for whom stuff happened, so I claimed full benefits at 66 rather than defer until 70. Deferral is a good plan if you're in good health and are financially comfortable.

Buy the car you’re leasing

New-vehicle prices rose 13.6% since March 2021, while prices for used cars/trucks were up a whopping 34.7%. If you have a vehicle lease expiring soon, you possess a valuable way to avoid those higher prices.

That’s because your vehicle’s lease-end price was set when your lease began, prior to the current inflation...

Even if you really want to get rid of it, buy it anyway. It’s now a (lightly) used vehicle whose market value has jumped about 35% in the past year. So sell it yourself, and pocket the profit on the difference before buying something else. If you simply return it to the dealer, they will do the same thing and, of course, share none of the profit with you.

We bought out our leased car three months ago. It was the right thing to do, kind of like going to the dentist.

Seek a higher return on happiness

Take a moment and think about what you’re spending money on and why. And then stop spending money on the unnecessary things that don’t bring you joy. After all, if you stop spending money on something, by definition, you are no longer impacted by inflation in that area...

take just a week (a month is even better) and commit to deliberately reflecting on every single expenditure made during that period—from the auto-payment on that streaming service to filling up your gas tank—transformational things can happen...thinking about that one expenditure allows you to rethink where you are going—literally and figuratively.

COVID-19 caused a lot of people to reflect on their lives before inflation struck. What one needs vs. what one wants is an age-old question, but it's still relevant. I want the latest iPhone but the almost-four-year-old iPhone XS Max satisfies all my needs (except for status and techno-lust), so resist temptation!

Ask for a raise

The salary increases one normally gets are likely to be below the rate of inflation, so it is important to ask for higher raises...Given the state of the labor market—this time in favor of workers—summon up courage and go ask for the raise. You need it.

I only expressed unhappiness to management about my pay a couple of times in my career. Each time I was fully prepared with comps, a list of extra things I did, and even a worst-case scenario if the discussion went south and I had to leave the company. Even if the worst-case scenario is improbable, it's good to go through in your mind (see "happiness" above) and enter negotiations with the confidence that walking away from a job isn't so bad.

Time your expected purchases

Consumers are often advised to have cash and other liquidity available for unexpected expenses, such as house or car repairs or even medical bills. But there is another use for that cash on hand: making expected purchases on sale and ahead of time. While this only works for nonperishables, there is real value to be reaped by buying goods when the price is right and in quantities that make sense.

...households tend to hold inventories of consumer goods worth about $1,100 on average. By shopping strategically and optimally managing their inventories, households can potentially earn returns well above 20% on their “household working capital.” The key is not to stockpile too much at full cost and buy only when the price is right.

Stockpile supplies when prices are low. Clothing, however, carries the risk that tastes change: you may not like the swimsuit you bought on sale last winter.

Don’t add explicit inflation protection

While there’s nothing wrong with maintaining a long-term allocation to Treasury inflation-protected securities (TIPS) for diversification, tactically adding them as a hedge may not have the intended effect. TIPS performance is driven by unexpected changes in inflation expectations. So while inflation is high today, the likelihood of inflation expectations surprising to the upside going forward seems low now that the Federal Reserve is actively tightening monetary policy.

Gold, meanwhile, has been an awful inflation hedge since gold futures began trading in 1975, in part because they tend to rise in anticipation of inflation (rightly or wrongly) rather than with inflation.

Even with the recent period of higher inflation, average inflation is less than 3% over the past five-year and 10-year periods. So rather than adding an explicit inflation hedge, you are better off reviewing the underlying assumptions of your financial plan to focus your attention on items that are within your control.

Plus, most investors already own the best asset to combat inflation: stocks. A big reason stocks beat inflation over time is that corporate earnings and dividends tend to grow faster than inflation.

I followed my own advice from one year ago, and it holds up: If we are going to reprise the 1970's, shift some investments into real estate, gold, art, or more stable foreign currencies that can keep up with dollar inflation. (I would recommend cryptocurrencies, but I don't understand them well enough.) Get out of bonds and low-growth dividend paying stocks. If you have variable-rate loans, convert them to long-term fixed-rate debt.

Control your lifestyle creep

spending inertia is very common and, oftentimes, there are some expenses that can be cut out with minimal impact. A good place to start this budgeting process is to simply pull all of one’s bank account, credit-card and debit-card statements and look for any recurring expenses for subscriptions or services that may no longer be needed.

COVID's silver lining: we bundled our shopping expeditions, doctor's visits, etc. to minimize car trips before gas spiked, cut back on recreational travel, and cooked more often. We're spending less in total than we did before COVID but I draw the line on subscriptions; we're keeping them all.

Account for shadow inflation

Do you remember when your restaurants gave you free bread and butter? When soda refills were free? Or when your hotel room was automatically cleaned, and you could count on fresh turned-down sheets before bedtime? With the cost of goods rising rapidly, along with the current labor shortage, many of the services we have grown accustomed to are no longer included without an extra fee...

Since it is likely right now that the cost of goods and services will continue to rise, build a buffer into your budget for spending on meals and other services that are affected by this cost increase.

The message seems to be that freebies are a vanishing species, hence inflation is worse than we thought, and we should "build a buffer." Very helpful! (sarc)

Buy inflation-indexed stocks

Investors should purchase stocks from established companies—such as supermarkets—whose revenues are indexed to the inflation rate. Inflation is a basket, and the best thing correlated with the change in the price of the basket is exactly the basket. Food is sold in supermarkets and, therefore, the inflation rate of food is highly correlated with the revenues of those companies. Because those companies have small margins, their earnings also are correlated with the inflation rate. Hence, buying a claim on the revenues or the earnings has to be correlated with the inflation rate.

My own preference is for real estate stocks or the hard asset itself. Though risky, real estate returns, especially with leverage, exceed inflation.

Update your résumé

I encourage individuals to update their résumés. Given the tight job market, there’s an opportunity for many employees to find new positions that will pay them more—and a higher salary is obviously a benefit in an inflationary environment. But workers may be able to find a job that is more personally satisfying as well.

The retirement nest egg is big enough so that I don't have to go back to work...yet. If inflation continues for a couple more years, then the résumé will have to be dusted off.

Watch for falling prices

One strategy for dealing with inflation is accelerating certain purchases. This might seem counterintuitive given the impact of inflation on the economy. However, in certain scenarios it is possible to selectively capitalize on the current environment. Many consumers will need to cut spending on discretionary items, so a lack of demand may cause the prices of various nonessential goods to decrease. This can present a unique buying opportunity.

If you planned to pursue new hobbies in retirement, for instance, and are fortunate enough to have ample cash flow, it’s possible to make the most of this inflationary environment by accelerating the purchase of select recreational items as their prices fall. The key is to identify where you have some financial flexibility and make the most of what is otherwise a very challenging situation.

Prices fall with products that no one else wants (duh!). Time to fill your space with hardcover books and CD's.

Invest in alternative energy

Investors may want to consider alternative-energy stocks as an inflation hedge...But the war in Ukraine has further underscored the importance of sourcing alternative energy...While traditional energy may outperform over the near-term, the drive toward clean energy seems unlikely to reverse and may present a better long-term opportunity for socially responsible investors and the planet.

Even if you don't buy alternative energy stocks, get out of fossil fuel companies like Chevron and Exxon-Mobil. Their shares have doubled in the past year, so take the profits. The long-term prognosis is bad.

Better insulate your home

One of the best investments for a return on your dollar is to better insulate your home. This is particularly important given the current higher costs of fuel. Often, you can get a free energy assessment from your power company, with a to-do list for lowering your energy costs.

The upgrade will eventually pay for itself—sometimes in as little as three to five years—and you will have lower heating and cooling bills that will outlast this inflationary period. If it takes five years in saved electrical and fuel bills to recoup the expense, you likely just got a lifetime 20% return on your insulation investment. And as the costs of fuel and electricity go up, so does your percentage saved.

Insulating the house has been recommended for decades, and we haven't done it because we're highly allergic to the dust that project will create. Besides, it's cheaper to wear a sweater during the winter and go to the air-conditioned mall, library, or theater during the summer.

A few final words of advice, applicable to non-inflationary times, too:

1) Temper your lifestyle to be less than your income (easy to say, but pride and pleasure are powerful obstacles);

2) Pay off your credit card balances every month;

3) Do all you can to make your marriage work.

Buying a Used Car: the Joy Was Absent

At 9,000 miles the 2019 model still looks like this.

Yesterday I went to the dealer to buy the 2019 SUV at the end of its three-year lease.

In 2015 we had switched from the buy-and-hold-till-the-wheels-come-off strategy to one of leasing a new car every three years: 1) technology was changing rapidly; 2) we could afford the monthly hit; 3) slowing reflexes and poor vision argued against purchasing a long-term asset.

6½ years into the plan circumstances changed. Runaway inflation in both new and used cars, plus the ultra-low mileage during the lockdown, made the case for buying the leased car overwhelming.

And so we did, though writing a check put a dent into the cash cushion we had built up in retirement.

Not having to make a car payment going forward should have made me happy, like the last house payment in 2016, but the feeling was different. The joy was absent.

On the way out, I saw our same model, one year older and looking like it had been driven a lot more, going for $12,000 above our price. OK, I feel better now.

Makes Sense, But It's Not Enjoyable

Our 2019 Lexus has mainly sat in the garage.

In July we realized that, contrary to the original plan of turning the car back in, there was a distinct possibility that we would exercise the fixed-price purchase option to buy the car at the end of the three-year lease.

A quick check of prices shows that a used car of the same year and model is going for $7,000 more than our option price.

Mostly because of the pandemic, at 8,000 miles in 27 months we are also well under the expected mileage for the model.

Now it's March, when our lease expires.The Wall Street Journal says that the 2021 price of the average used SUV is $31,415, which is $6,124 higher than 2020.

Prices of used SUVs. "Then"=2020. "Now"=2021. 2022 is likely higher.

For the record our Purchase Option (before sales tax and processing expenses) is $33,719.46. Since it's right in the ballpark of the average SUV price, and we've only driven the car 9,000 miles in three years (normal wear and tear assumes 30,000 miles) we are proceeding with the purchase. A comparable new 2022 car, if we can find one, would cost at least $10,000 more than a new Lexus in 2019.

The heart wants to lease new, but the head says to buy used. Well, I've gotten this far following the head, but it's usually not enjoyable.

Trappings of Luxury Not Needed

Gone are the snacks and sodas. The car display has been removed. The free shuttle service to the shopping center has been cancelled.

Lexus has pared back the appurtenances at the San Jose service facility.

Coffee and water were the only offerings. The lounge had a few circular tables, along with a dozen comfortable chairs, spaced far apart.

The place seemed half as busy as I remembered. Perhaps the brand is less popular, or perhaps Lexus customers have drastically cut back on their driving. We've only brought in the car twice in 2½ years; the original expectation in 2019 was for four service visits. The shop was done in two hours; if they're going to be this quick I don't need trappings of luxury.

Nothing's changed from last month's rumination about buying out the lease. At 8,000 miles in 28 months we've become the little old lady (not the one from Pasadena) who hardly takes the car out of the garage.

Maybe we'll end up like Bob Costas, who's driven his 14-year-old Lexus LS 460 only 50,000 miles:

Lexus makes good cars—they last a long time and have a classic design. If you spray it with a hose now and then, no one will know the difference between the 2021 and the 2007.

Spraying with a hose now and then---I wish it were as easy with these old bones.

Leasing a Car: Changing Our Mind Again

Our 2019 Lexus  has mainly sat in the garage.

Six years ago, for the first time in our boomer lifetime, we leased a car. That experience was pleasant, so we returned the vehicle at expiration and leased another one. The original rationale for leasing has not changed.

The century-old automobile industry is undergoing such speedy technological change that it would be imprudent to absorb the capital cost of an asset that could well be obsolete in 3-5 years.

However, COVID-19, like in many other areas of life, has forced the re-examination of premises; used-car price escalation has caused us to consider buying the automobile at its option price in 2022.

Used-car prices, which have soared in recent months, are now defying economic gravity.

Once thought of as the ultimate depreciating asset, some car owners are finding their vehicles are worth as much as—if not more than—they originally paid for them, dealers and analysts say...

The recent jump in used-vehicle pricing is the latest in what has been a topsy-turvy year for the U.S. car business. Consumer demand for cars and trucks is near an all-time high, but car companies are struggling to keep up, slammed by a global computer-chip shortage that is curtailing factory production on the new-car side.

A quick check of prices shows that a used car of the same year and model is going for $7,000 more than our option price. Mostly because of the pandemic, at 8,000 miles in 27 months we are also well under the expected mileage for the model.

We would be leaving money on the table if we just turned it in. Besides, we will need a vehicle anyway and are aghast at the cost of leasing a new one.

It's likely that we'll exercise the option and be owners again, but a lot can happen in a year.

Old and Beautiful

At the car service center yesterday were two immaculate cars in the showroom: the first, a sporty model with a big red ribbon on top (some people give cars as Christmas presents) and the second, a sedan with a 20th-century design sensibility. Was Lexus making a retro edition?

No, the car was really from the 20th century, 1990, to be exact. The owner had driven his LS400 over 500,000 miles before bequeathing it to his son.

Lexus had decided wisely, IMHO, that showcasing a still-on-the-road example of its first model was good advertising. Both the interior and exterior were in better shape than my two-year-old crossover. The original sticker, with a $40,000 price tag, was taped to the left rear window.

It wasn't retro, just old and beautiful.

Same Persons, Different Decisions

We've always driven--and obviously owned--our cars for at least 150,000 miles, but when the 18-year-old Dodge Caravan finally expired in 2015 we decided to lease its replacement. The century-old automobile industry is undergoing such speedy technological change that it would be imprudent to absorb the capital cost of an asset that could well be obsolete in 3-5 years.

Over-capacity, a plethora of producers, and rapid obsolescence should make it a buyer's market for used equipment, such as cars coming off lease, but to almost everyone's surprise prices are holding steady. One of the reasons is hurricane damage.

The number of lease returns is expected to reach 11.3 million in the three years ending in 2019, 49% more than the same three-year period that ended in 2016, according to research firm J.D. Power.

Thus far, the market is absorbing the extra supply thanks to tighter inventory controls by various industry players and the loss of as many as a half-million cars to hurricanes in Texas and Florida.

If both new- and used-car prices go crazily upward in a year, that would be a compelling reason to buy the Lexus when the lease expires in October (at a fixed price of 70% of cost and mileage of 30,000). Otherwise, we're returning the best car we've ever driven.

We're the same persons today as we were decades ago, but our decisions sure are different.