Fend off inflation with these strategic tips

CPI, PPI, PCE, PCE minus food and energy … there seem to be countless ways (and acronyms) Wall Street uses to measure inflation, which is simply defined by most economists as “too much money chasing too few goods.”

From an investor's point of view, however, the calculations and semantics of inflation are less important than a plan of action. Investors, especially retired ones, are more interested in figuring out what to do about rising prices than what to call them or how to derive them.

That’s why InvestmentNews caught up with Laurence Kotlikoff, professor of economics at Boston University and the bestselling author of "Money Magic," to get his outlook on inflation and how investors can prepare their portfolios to defend against it.

InvestmentNews: Which way do you see inflation heading into the end of the year? Why?

Laurence Kotlikoff: I think inflation will come down shortly. As we can already see, the housing market is slowing, rents are softening, supply chain bottlenecks are loosening and the oil price has plateaued. Yet, despite these positive economic outlooks, everyone is predicting a recession.

Ongoing talks of a recession create an unnecessary rise in the fear factor, which leads people to start cutting back on their spending and allows businesses to capitalize on recession claims to raise prices. Based on this, claims of recession risk are becoming a self-fulfilling prophecy.

IN: Are inflation-indexed bonds the best way for investors to protect themselves from higher prices? Which kinds?

LK: Yes, undoubtedly, based on how inflation-indexed bonds function, it is the absolute best inflation hedging solution for investors. I would recommend two types of bonds: Treasury inflation-indexed bonds and I bonds. But bear in mind that I bonds are limited to $10K per household member.

IN: What about other types of inflation-fighting strategies that may have worked in the past, like buying hard or real assets?

LK: Don't prepay your mortgage; inflation may actually work in your favor. Besides, you'll get to repay in watered-down dollars.

My advice, buy next year's paper towels now; their prices will only rise. You'll earn a zero real return if you buy them now, and the real short-term investment return is negative, but you will save. Additionally, buy durables, like furniture and cars, that won't lose value due to inflation. Look for other job options to ensure continued earnings, or possible wage increases and job stability. Lastly, individuals should consider holding foreign currencies, like the British pound, whose recent decline seems unreasonable and will do better if inflation here exceeds inflation there.

IN: Should investors look to add alternative assets to their portfolios like hedge funds or private real estate to protect against inflation and volatility as well?

LK: Yes, these are indeed good options. Further, so is the stock market now that it has declined, making it easier for individuals to start investing and trading.

IN: What should those in or near retirement do with their cash? Inflation is high and may be rising, but so are short-term yields.

LK: Do 'upside investing,' which simply means you, one, invest in the S&P and TIPS or I bonds and specify a period during which you’ll convert your stocks to TIPS or I bonds. Two, you build a base living-standard floor assuming all stock investments are lost. And three, you increase your living-standard floor only when and if you convert stocks to TIPS/I bonds.

In short, you treat money in the market as gambling stakes. And you don’t spend any winnings until you’ve left the casino. In the meantime, you assume you’ll leave empty-handed and spend on that basis at your base living-standard floor.