Just when inflation looked manageable, it surged again. US consumer prices rose 3.3% year over year in March, as higher energy costs and other price increases began hitting household budgets. Gas prices alone are up about $1 a gallon from a year ago.
In this kind of environment, an effective approach to beating inflation may be 2-sided: Adjusting your day‑to‑day spending and ensuring that your mix of investments can keep up with rising prices over time.
10 ways to beat inflation
Here’s a checklist to help cover both your budget and your portfolio.
1. Start with your spending to find out how inflation affects you
Not all inflation hits equally. Housing, food, insurance, and transportation often rise faster than the headline number.
What to consider:
- Review your last 3–6 months of spending and flag the categories that have risen the most. Fidelity’s spending experience lets you easily track spending daily and over time.
- Consider ways to spend a little less in those categories. Some of the big ones tend to be groceries, gas, and utilities.
- Review your spending regularly—your biggest inflation pressures may shift over time.
The more precisely you understand where inflation affects you, the more targeted (and less painful) your fixes can be.
2. Lock in costs where you can
Inflation hurts most when prices reset upward again and again. It can be difficult to keep saving when essential expenses seem out of control.
What to consider:
- Renegotiate recurring bills like internet, cell phone service, or insurance.
- Consider longer-term contracts where it makes sense or enroll in autopay for a discount on service.
- If you rent, start lease renewal conversations early. If you own, a fixed‑rate mortgage can help keep payments stable—and it may be worth keeping an eye on mortgage rates in case refinancing opportunities improve.
3. Build up your emergency savings
Building a robust emergency savings account is one of the first steps Fidelity suggests taking as you develop your financial foundation. But it’s important to be aware of inflation’s impact on idle cash. If the rate that prices increase is generally greater than the return on your savings, you may lose purchasing power. If you’ve ever heard that a dollar doesn’t go as far as it used to, inflation is why. Taking advantage of higher yields where you can find them often makes good sense.
What to consider:
- Keep an emergency savings account that could cover essential expenses for 3 to 6 months. Consider investing any other cash appropriately for your goals, time horizon, and financial situation.
- Consider short‑term savings in vehicles that can adjust with rates, such as high‑yield savings, money market funds, or short‑term Treasurys.
Read Viewpoints: 7 ways to earn more on your cash
4. Make sure your portfolio is built for growth potential
Over long periods, the growth potential of stocks has historically been one of the most reliable defenses against inflation.
What to consider:
- Ensure your portfolio includes appropriate exposure to stocks and other assets that fit your goals, risk tolerance, and time horizon. To get started, read Viewpoints: How to start investing
- Younger investors with a long time horizon can typically devote more of their money to stocks since it may be a long time until they need the money. As a result, younger investors may already have built‑in inflation protection through equity exposure.
- More conservative investors may need to be more deliberate to help fight inflation’s impact.
5. Add inflation‑resistant building blocks
Some investments have historically held up better when inflation runs hotter than expected.
Stock investments to consider
- Commodity producers (energy, materials)
- Value stocks, which may have indirect commodity exposure
- US and international stocks
- Real estate investment trusts (REITs)
Fixed income investments to consider
- Treasury Inflation‑Protected Securities (TIPS)
- Shorter‑duration bonds
- Some high‑yield bonds
Other diversifiers
- Gold
- Real estate
There’s no single silver bullet but diversifying across different inflation‑resistant assets may help your buying power keep up.
6. Be selective with bonds
Traditional bonds can struggle when inflation and interest rates rise together.
What to consider
- Review duration exposure. Because traditional bonds tend to fall in price when interest rates rise, longer‑term bonds are often more sensitive to inflation surprises.
- Consider a mix of shorter‑term bonds and inflation‑linked bonds, like Treasury Inflation-Protected Securities (TIPS), when it makes sense for your goals and overall investment mix.
- Keep bond allocations aligned with your risk tolerance, time horizon, and income needs.
Bonds can still play an important role in your portfolio, but their job may change in higher‑inflation environments.
7. Consider international investments
Inflation doesn’t move in lockstep around the world—and neither do investment returns. Differences in economic growth, inflation trends, interest rates, currency movements, and market cycles can help international investments play a diversifying role in a portfolio.
Adding investments from outside the US may help reduce reliance on any single economy and potentially smooth returns over time. Read Viewpoints: Diversification: Why and how to do it
If you’re not sure how to judge how much international exposure makes sense for you, consider talking to a financial professional or consider a managed option. Professionally managed options like a target date fund or a managed account typically include global diversification as part of their design.
At Fidelity, investors can choose from a range of planning and investment management services, including everything from a robo advisor to a dedicated hands-on professional. If you prefer to take a do‑it‑yourself approach, read Viewpoints: How to buy international stocks
8. Don't overdo inflation hedges
An inflation hedge is an investment meant to hold its value, or lose less purchasing power, when prices rise. That’s different from growth investments, like stocks, which allow investors to participate in the earnings of a company through potential capital appreciation and dividends. Even though they can be volatile in the short run, the hope is that the company will grow over time.
What to remember
- Assets like gold don’t compound the way stocks do. They may help preserve value during spikes of inflation, but they don’t generate earnings or pay dividends or interest.
- Investing heavily in traditional inflation hedges during normal inflation periods can carry a high opportunity cost, especially if it reduces exposure to assets that tend to grow over time.
- A modest allocation may help, but perfect inflation protection is hard to achieve.
The goal isn’t to predict inflation perfectly but to learn how to protect your money against it. Diversification and an appropriate mix of investments that fits your goals, risk tolerance, and time horizon can help keep you on track for your goals, even when inflation doesn’t behave as expected.
9. Retirees: Protect your retirement income
Inflation can pose an even bigger challenge in retirement. Once you stop working, the focus often shifts from growing your savings to making sure your money lasts—while still keeping enough growth potential to help offset rising prices over time.
What to consider
- Use inflation‑adjusted sources of guaranteed income, such as Social Security or certain annuities, to help cover essential expenses in retirement.
- Delay Social Security (if possible) to increase inflation‑adjusted benefits.
- Invest for growth potential with a portion of savings to help your money keep pace with inflation, particularly over longer retirements.
- Review withdrawal strategies regularly as your life and markets change so your plan can stay flexible.
Read Viewpoints: 3 keys to your retirement income plan
10. Revisit, rebalance, repeat
Inflation changes over time, sometimes quickly. Being prepared is what a good plan is all about.
What to do
- Review your budget and portfolio regularly.
- Rebalance when your investment mix drifts.
- Adjust as inflation trends, rates, and your life changes.
Inflation may be unpredictable, but your approach doesn’t have to be.