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In the United States, we haven’t experienced high inflation as much as other countries in history. Some people may feel that the possibility of hyperinflation is relatively low. Hyperinflation is considered an event that happens due to sociopolitical upheavals, wars, and their aftermath. It is difficult for governments to tax and govern the population after these types of events.
However, those events are symptoms of higher inflation. This year, the Federal Reserve plans to increase interest rates, consumers are seeing their purchasing power decrease, and labor statistics indicate we have a lot of work left to get everyone employed. While the possibility of experiencing hyperinflation in the United States is low, it’s a good idea to make appropriate preparations.
What is hyperinflation?
The term, hyperinflation is used to describe a situation where there are excessive, fast and out-of-control price increases in the economy. Inflation measures the pace of rising prices of goods and services. Since hyperinflation is rapidly increasing inflation, it’s usually used when the measurement is over 50% per month.
In a developed economy, hyperinflation is a rare event. It has occurred throughout history in many countries. One of the more recent events happened in 2018 when Venezuela’s currency lost 99.9% of its value in a short time. Imagine what it would be like to pay a certain price for a loaf of bread in the morning, then the cost doubles in the afternoon.
Signs of hyperinflation
It’s not pretty to think about what happens from hyperinflation. Just consider what happened to Germany in 1922. During the fall, hyperinflation took hold of its economy, causing consumer prices to rise. As this was happening, the value of their currency dropped significantly. The Great Depression that affected the world was sparked by this severe economic downturn in Germany.
Is there a way to predict this inflation risk? Not necessarily, but there are signs that make the possibility of inflation greater. Let’s look at some of these now:
- Significant increases in food prices are higher price increases from the past
- Increases in the Consumer Price Index (CPI)
- Declines in the Gross Domestic Product (GDP) over the quarter
- Increases in the money supply
- Bearish situations for long-term Treasuries and bullish for commodities
- The private sector stops purchasing U.S. Treasuries
- Federal Reserve is purchasing 70% or more of new U.S. treasury debt
- Countries like China are moving away from the U.S. Dollar as a Reserve Currency
The important thing to remember is that there are two main causes of hyperinflation. The first is there’s an increase in the money supply which isn’t supported by economic growth. Inflation increases as a result.
The second cause is there’s demand-pull inflation. This means that demand outstrips supply. These two causes have the same linkage. Both cause an overload on the demand side of the supply/demand equation.
How to prepare for hyperinflation
We prepare for natural disasters like tornadoes, floods, and earthquakes. So we should also have a plan for inflationary times. Even if the chances of hyperinflation are low, high inflation situations hurt our checkbooks. The best time to make purchases is before we’re in a situation of higher inflation.
Waiting until the inflation rate increases gives you far less purchasing power. You may find it hard to afford the things you need. It is often difficult to find certain items during these times.
Natural disasters and societal unrest are situations that are handled differently than hyperinflation. To prepare for hyperinflation, you’re prioritizing your financial stability. That helps protect you from the economic upheaval caused by changes in the money supply and price increases.
For example, before hyperinflation hits, it’s a good idea to look for a fixed interest rate. We’ve experienced low interest rates since the Great Recession of 2008. Even though they’re rising now, interest rates are much lower than in the 1980s and 1990s.
If you have a variable interest rate, your rate increases in times of hyperinflation. That’s because the federal government will keep raising interest rates to prevent banks from failing.
Difference between inflation and hyperinflation
Inflation is a general rise in consumer prices in the economy over a period of time. Your money won’t go as far in these situations. For example, let’s say you have $100 that you can buy 20 widgets at the beginning of the year. By the summer, that $100 can buy 18 widgets. Inflation is basically the loss of the value of money.
The other key attribute of inflation is monetary growth relative to the output/availability of goods and services in the economy. That means if one commodity rises sharply, but commodity prices fall for others, it is not considered inflation. For the example given above, there would have to be other products, not just widgets, that experience a price increase.
Hyperinflation is a form of inflation. The difference is that prices increase in an extremely sharp manner. A large increase in the money supply that’s not supported by growth in GDP occurs. There’s an imbalance between the supply and demand of money. Left to its own devices, this results in sharp price increases and the value of the domestic currency decreases.
What to avoid before hyperinflation
Accounting for inflation is an important aspect of your personal finance and financial plan. Before you start seeing rising inflation, there are some ways to help protect your finances.
If you’re an investor, don’t make drastic changes to your investment approach. Especially if you’re a long-term investor, you don’t want to adjust your strategy that much. Keep a diversified portfolio that has some inflation-safe investments in the mix.
While there’s no inflation hedge silver bullet, consider that with a long time horizon, you’ll generally live through high and low inflation levels.
You might also consider hard assets to add to your portfolio. Precious metals, commodities, and real estate holdings could be a safe haven from runaway inflation.
Give yourself time to prepare for hyperinflation
You can’t predict when a natural disaster will happen. That’s why you have to prepare for it well in advance. The same goes for protecting yourself during hyperinflation. The best way to do this is to start preparing well before you see indicators like higher inflation, rising unemployment, etc. It’s especially critical if you’re on a fixed income to prepare yourself early.
During normal economic times is when you should start your preparations. Getting yourself financially ready during the good times will allow you to navigate more effectively during the bad.
Supplies to buy strategically ahead of hyperinflation
Before running out to the store, you need a strategic plan for the items to buy beforehand. Here are a few tips:
- Don’t pay for supplies that you can’t afford. You shouldn’t be going into credit card debt to stock up on essentials.
- Make a solid list of specific items that your family needs. Be sure to prioritize them by how important they are to your family.
- Set aside storage space to store your items ahead of time. Keeping your supplies well organized using shelves or empty bins increases your efficiency.
There are certain categories of supplies that you’ll want to have before hyperinflation. Here are items that are likely to experience shortages:
- Canned foods – Vegetables, fruit, and meats
- Baking supplies – Flour, yeast, sugar, salt, and baking soda
- Dry goods – Pasta, rice, beans, and spices
- Freeze-dried foods – Fruits, vegetables, and meats
- Paper products – Paper plates, paper towels and toilet paper
Store plenty of extras of everyday basics
The items that you use every day should also be kept on hand. Think of the items that experienced a shortage during Covid. Some ideas include:
- Over the counter medicines
- Vitamin supplements
- Immune boosters
Prepping now will stress you less later
If you try to prepare for hyperinflation while interest rates and inflation is rising, you’re going to feel it on your wallet. Take a proactive approach to getting your home and finances in order. You’ll save yourself from future headaches and having to play defense when hyperinflation happens.
You’ll sleep a little better every night knowing that you have what you need to help ride out the situation. Do yourself a favor and avoid watching the stock market during these times. As long as you have a long-term approach, you should be able to bounce back.
Preparing for food price inflation
Food is one of the biggest costs that households have. You will still need to buy perishable items like milk and bread during hyperinflation. With decreased purchasing power, you need to have a plan for your weekly meals.
Meal prepping is a great way to save money, reduce food waste and plan out meals. Get into the habit now of planning your grocery trips and meals.
Look for ways to save money on groceries by using tactics like using coupons. Check out the weekly grocery ads and find out what’s on special. Plan your meals around what’s on sale. Again, this is a habit to start now, so you’re ready when prices start to rise.
Stockpile nonperishable goods
Your essentials list should include nonperishable items that have a long shelf life and don’t require refrigeration. refrigeration. Dried fruits, jerky, peanut butter, nuts, seeds, granola bars, and dried or canned soup are great choices.
What else can you do to get ready for hyperinflation?
You’ve got your panty full of nonperishable foods and are using tactics to save money on food. Those are great steps to get ready for hyperinflation. To take it to the next step, build those habits with your family so everyone is better prepared for uncertain economic times. After all, if you’re not all ready for the situation, it will affect your overall ability to navigate these challenges.
Invest smart and diversify
As part of your investment strategy, consider ways to hedge against hyperinflation. Doing this in the present is important because it is typically too late when hyperinflation occurs. Investments in agriculture, gold and silver accumulation, and reducing your exposure to the U.S. dollar are some tactics that might be useful.
Assets resistant to inflation
Certain assets are more resistant to inflation than others. If you’re looking for an asset class to protect from inflation, here are some to look at:
- Real Estate Investment Trusts (REITs)
- 60/40 Stock/Bond portfolio
- The S&P 500
- Real estate income
- Treasury inflation-protected securities
- Metals like gold and silver
Make more money
Increasing your income allows you to improve your current financial position while putting you in a better spot for hyperinflation. Look for ways to make more money whether it’s a side gig, weekend job, or changing to a higher paying job. If you don’t necessarily want to make the time commitment for another job, there are flexible options like driving for Uber or Lyft.
Pay off your debts
Another way to improve your cash flow is to pay down your debts. Credit cards, student loans, and other loans are monthly costs that take away from building your savings. Use various debt payoff methods like the avalanche and snowball debt strategy to pay off your debts faster.
Save money now
Having an emergency fund is critical in times of high inflation. Start building the habit of saving now to help you through any tough economic situation. If you don’t have a lot of money left over after bills, look at ways to save money on your current lifestyle.
Budget and plan for the future
Budgeting is a critical habit that everyone can benefit from. Especially if you have a family, monthly expenses can easily get out of hand. Use a budget to save more money, cap your spending, and pay down debts.
What to buy when hyperinflation hits
When inflation is already too high, you should stay away from investments from long-term bonds and certificates of deposit. You might miss out on higher interest rates later. Stocks still tend to beat inflation, even when their growth has slowed.
Technology and consumer goods are good areas to invest in during these periods.
Another possibility is investing in alternative investments. Vintage toys, trading cards, fine art, vintage cars, and other collectibles are good hedges against inflation.
Final tips on preparing for hyperinflation
Events like the Great Depression are ones that few of us have lived through. There is a lot to learn from these historic hard economic times that we can take and apply to the present day. Hyperinflation and rising inflation aren’t in your control. What you can control is how prepared you are for these situations.