Inflation is a natural part of a growing economy, but over the past 12 months, it’s been surging. The dollar you had one month ago is worth less today, so it’s important to implement a new strategy for your money so you’re consistently making more and not disrupting your retirement savings strategy.

Types of Inflation

Understanding the three main types of inflation will help you understand why the costs for certain goods have jumped so much in the last year, and why certain investments make more sense than others.

Demand-Pull Inflation

Demand-pull inflation occurs where there is a higher demand for a product or service than supply that exists for such a product or service. Airline ticket, gas, and hotel room pricing is often a direct result of demand-pull inflation. There might not be enough to go around, but spenders still want to travel, so they will pay the higher prices. Demand-pull inflation is caused by a number of factors, including:

• Strong economy: When unemployment numbers drop, more people have more expendable income to spend, which drives demand for goods and services.
• Supply chain issues: When production cannot meet the high demand for an item, companies will increase prices.
• Inflation predictions: If consumers suspect that prices will be rising soon as a result of inflation, they might spend more than they would to lock in pricing—this leads to supply issues.

Cost-Push Inflation

Cost-push inflation is the flip side of the same coin for demand-pull inflation. As the cost for raw materials goes up, so do the prices that businesses set for their goods. A plate of spaghetti and meatballs from your favorite Italian restaurant will be more expensive, as the cost for ground beef has risen. Circumstances that lead to cost-push inflation include:

• Increased costs for labor, materials, or goods: Companies might respond to higher prices by cutting back on production, which can trigger higher supply costs, which trickle down to the consumer.
• Supply chain issues: Natural disasters (or a pandemic) or new or modified regulations for overseas goods can create unexpected supply chain disruption.

Built-In Inflation

Built-in inflation is driven by the expectation of future inflation. Workers ask for more money to keep up with the rising costs of goods, and higher wages drive up the cost of production, which leads to a cycle with cost-push inflation. Because of this, built-in inflation is often called the wage-price spiral. Built-in inflation does not occur on its own; it’s a response to demand-pull and cost-push inflation.

Where Should You Put Your Money During Inflation?

Now that you understand the bigger inflation picture, it’s important to make some decisions about where to put your money so inflation doesn’t deflate your retirement. The cost of living is increasing by 9.1% annually, but many savings account rates are less than 1%—so where should your cash go?

Short-Term Bonds

Purchasing short-term bonds is a way to keep your money safe and accessible. Inflation-indexed bonds have variable interest rates that reflect inflation rates; Treasury Inflation-Protected Securities are one example of these, as they are tied to the Consumer Price Index. As the CPI rises, so do the value of Treasury Inflation-Protected Securities (TIPS).

Commodities, Including Gold

Commodities, which includes gold, other precious metals, as well as agricultural goods like soybeans and cotton, are in high demand during periods of inflation. Because there is increased demand, their prices, and value rises. Talk to your financial planner for guidance, but in general 5% is the recommended amount of your portfolio that should go to precious metals and other commodities.

Real Estate

Real estate is widely regarded as an investment that can handle inflation, though it’s become increasingly difficult to become a homeowner with prices rising due to a jump in labor costs and supply chain issues. Consider real estate investment trusts (REITS), which are companies that manage micro-investments in properties, opening up doors to investors just starting out.

Stocks

Some stocks can be wise to invest in during inflation, particularly those from companies that operate in consumer goods. As the prices for their products go up, so do these stocks. You might also consider buying stock in hospitality brands (hotels, airlines), as post-pandemic travel has made a strong rebound.

Tangible Assets

Collectibles such as art and vintage cars have hard-to-predict value, but usually appreciate over time, offering a good return in inflationary times.

Cash

Cash doesn’t offer big returns, and the value of the dollar is being diminished by rising inflation, but it’s important to keep enough on hand for emergencies. Stash several months—or even a year’s worth—of cash in case you need it.

Frequently Asked Questions

What assets do best during inflation?

That depends on how extreme the inflationary period is. According to experts, in today’s climate, your best bet is to invest in TIPS and commodities. If inflation were a bit lower (3.3 to 4.9%), you’d want to add energy stocks to the mix. At 2.2 to 3.3% inflation, it’s best to stay the course on any stocks investments.

Remember: Every situation is different and past performance does not always indicate future performance.

How do you keep cash from being impacted by inflation?

Look into high-yield-reward checking accounts, which offer higher interest than most other banking accounts—we’ve spotted APY as high as 4.25% this year. They’re also federally insured, up to $250,000. What’s the downside? They have strict rules attached to them, usually requiring six to 12 transactions per month (a problem solved by setting up an auto-direct deposit). In addition, most of the highest APY rates only apply to balances up to $10,000.

Final Thoughts

The bottom line is that diversification is the most important aspect to creating a portfolio that can handle and even improve during inflationary periods. In addition, these inflation hedge investments might not make sense for you, your particular timeline, and personal retirement goals. The best way to understand where to reallocate your money is to talk to a certified retirement advisor.

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