When inflation starts rising, here’s what you can do

Budgeting by values

We can’t control inflation—but we can control how we respond to it. These tips can help you keep calm and make smart money moves.

In 2021, inflation has been on Americans’ minds—one recent survey found 87% of U.S. adults are at least “somewhat concerned” about it.Disclosure 1 The U.S. hasn’t experienced significant inflation in years, but in June, the Consumer Price Index (CPI) inflation report—which is used to measure the rising cost of goods—showed that prices rose 5.4% from the year before.Disclosure 2

“Inflation just happens to be the hot topic right now,” says Brian Ford, head of financial wellness at Truist. “There’s always going to be some hot topic that can be a barrier to our financial confidence, and inflation just happens to be the main one right now.”

Higher inflation may or may not stick around—but if it does, you can prepare both your mind and your wallet by practicing good financial habits in general. 

For peace of mind, focus on what you can control

While not every industry is affected by inflation equally, it can affect the price of (and your ability to pay for) nearly everything—from your next vehicle to the chicken at the grocery store—as well as erode your retirement savings.

Ultimately, inflation is just one of those unpredictable things that you have no control over—which is why the financial and mental advice is similar here: Focus on what you can control.

“I always let people know, ‘Look, don’t panic.’ There’s always going to be some market forces that we can’t control,” Ford says. “This is why we tell people to focus on what they can control—and to be well-diversified. Because if they’re not, then inflation can hurt them. But if they’re well-diversified, then they’re just fine.”

Bright Dickson, co-host of the podcast “Money and Mindset With Bright and Brian,” shares similar advice.

“If you’re feeling really anxious about it, focus on what you can control, like your spending,” Dickson says. “It may be a good time to check in and reevaluate what you’re saving versus what you’re spending. Make sure that your savings are in a good place to combat whatever’s happening.”

Ford adds that if you’re doing everything else right with your money—like maintaining an emergency fund (one of the top ways to achieve financial confidence)—you should still be in good shape even when inflation spikes.

Read more: Grow your confidence by knowing how much to save for emergencies

Investing TIPS for warding off inflation worries

Bonds typically offer a lower ceiling for potential gain, but come with the benefit of a fixed return (e.g., 2% each year for a fixed number of years). But if inflation outpaces that—say, 3% a year—those 2% annual gains don’t look so hot.

Luckily, there are bonds created specifically to help protect investors against inflation—they’re called TIPS, which stands for Treasury Inflation-Protected Securities.

“These are government bonds that basically mirror the rise and fall of inflation,” Ford says. “They mirror the CPI.”

The returns TIPS offers go down or up in conjunction with the current inflation rate. So in years when inflation is low, TIPS won’t do a ton for your portfolio. But if inflation takes off, they can offer some padding to your investments—it’s just one way to consider diversifying your portfolio.

“I don’t think you should go out and start selling your other stuff to buy TIPS when you think inflation is going to happen,” Ford explains. “But if you already have TIPS in your overall portfolio, they can help you become well-diversified.”

Adding TIPS to your portfolio is one way to help calm some of your inflation worries. But if you have a longer investing horizon and more appetite for risk, it’s also worth noting that stocks could still yield bigger returns in the long run—even with high inflation rates.

After all, inflation typically means certain goods and services cost more—and the companies you’re invested in could be the ones setting the higher prices. If the demand for the business is there, they can still be profitable even when the CPI skyrockets.

“There isn’t anything that is terrible to have during inflation, except for bonds that are long-term bonds,” Ford adds. “When I say well-diversified, I mean lots of different asset classes—lots of different time horizons and so forth—but TIPS could be part of that.”

While thinking about inflation and things we can’t control can be scary, Dickson reminds us that there are a lot of things that we worry about that don’t come to pass. “It may not happen, and if it does, it may not be as bad as we think it is.” 

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