Wednesday, November 10, 2010

How to manage inflation

With the Federal Reserve "monetizing the debt" or printing money and buying up Treasury securities from banks, it's time once again to review inflation strategy. Let's assume for the sake of this article that we're going to get an inflationary period in the near future. Maybe we will, maybe we wont, but let's just say we will. How do you deal with it? There are things that both retailers and consumers can do to cushion the blow.

First let's look at retailers. Assume that each time you place an order for inventory, it's going to be a little more expensive. For the sake of simplicity, let's say you normally keep a one-week supply of inventory on hand. Bump that up to about 8 weeks and keep it there. Why? Because once you've got that overstock, when you place your next one-week order and you see the price has gone up, you can raise your retail price on your entire stock and maintain a decent margin. You also will have the option of holding off on a price increase for a week or two and perhaps undercut your competitors for a bit. When the inflationary cycle dies down, and it will, and you notice prices haven't gone up for a few weeks running, start reducing your orders and getting back down to normal inventory levels. This is why inflation tends to drop off quickly when it's run its course. A lot of retailers will be doing the same thing and orders to suppliers will suddenly drop off a cliff. Your margin on your most recent purchases will be smaller, but your older stock should help make up for that. You'll also have a chance to build up some cash, since you'll have several weeks of smaller than normal inventory outlays.

What about the consumer? Well, retailers that employ the above strategy are going to be taking advantage of some nice profit margins on many of their products. They'll want to entice you into the store by offering "loss leaders". That is, they'll be willing to offer a few items at or even below cost in the hopes that you'll buy a few of the more pricey items while you're there. If you want to be thrifty, be flexible. Stock up on those loss leaders. Different stores will have different items on sale, so you may want to shop at several. You may also want to adjust to the idea that you may be having chicken for dinner 4 times in a week. An inflationary period is no time to be finicky. Take what they're giving. Stock up on sale items. If you don't have a pantry, make one. It might be a good idea to get a big freezer if you've got the room. You can apply the same strategy to more than just groceries. If the home improvement store has a super-sale on something related to a project you were planning on getting to "one of these days", jump on it. Your new kitchen faucet is still going to be worth one kitchen faucet no matter where inflation goes.

If you're on a fixed income, you may want to look for free-lance opportunities to supplement your income for a while. However, be careful. Fully investigate any offer before you sign on. There will be plenty of scammers trying to take advantage of consumer anxiety. If a deal sounds too good to be true, it is.

The most important thing to remember is Don't Panic! Keep a cool head and look for opportunities rather than obstacles. An inflationary spiral is a readjustment in the value of currency due to gross budget mismanagement. It wont last forever and you can navigate it. Knee-jerk reactions to this kind of financial upheaval almost always makes the situation worse. Politicians and policy wonks will be calling for things like price and wage controls. Don't go for it. Getting our currency situation back under control is going to be bitter medicine, but tighter government control over the free market is just snake oil. It's okay to be angry and frustrated and hold our leaders to account, but blame the player, not the game.

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