Some economist say that the actual inflation is more like 10-12% already and that the government inflation number (Consumer Price Index) calculation has been wrong - since they changed it years ago.
Reference Article: HYPERINFLATION AS EARLY AS 2010
Nixon created price controls and wage freezes in 1971 when inflation was only 4.7%. I think a lot of people are underestimating the power of inflation that we are going to see in the next few years. The last time the US economy had to deal with inflation was between 1971 and 1982. Despite the government efforts, inflation continued to increase until 1979, when it peaked at 13.3%.
Reference Article: How Bad Could Inflation Get?
In an inflationary economy, cash management becomes a much higher priority because of the drastic fluctuations in the daily value of the currency. Business will change, as production and sales are reduced while accounting departments are increased, as cash management becomes vitally important to the survival of the business. Low profit product’s are no longer produced because their profits are often completely gone by the time the products are sold. This also reduces the number of options that consumers have to choose from, which allows the remaining competitors to further increase their prices.
In an inflationary economy, marketing departments shrink and accounting departments grow, as the daily management of money becomes more important than producing or selling more products. This is the time to increase your cash reserves and reduce investments in low margin products.
Old Personal Finance Strategies
The coming wave of inflation will change personal finance strategies. Inflation creates a lot of confusion. Frugalness is no longer going to be a safe place. Creating a budget will not work. Adjusting your budget for inflation will not work. Using your saving or investments (based in dollars) will not work because they will be dwindling in purchasing power. Paying off your debt will not help unless your interest rates are higher than inflation.
The personal financial advice that has been good for decades, to eliminate debt, reduce spending, increase earning, will no longer work - although it will be critical to have done these things for the past decade to position yourself for the new inflation economy. But, very few have, because we have the highest consumer debt and the lowest saving rate on record.
The principles of economics have not change. If you spend more then you make, you will eventually have to pay for it – whether you’re a business a government or a nation.
High inflation will bring all sorts of nasty problems like; wage freezes, price controls, food hoarding, high gas prices and unemployment, as the government wages war on free market capitalism in an attempt to slow down inflation. Historically, government intervention has never worked and usually just makes things worse, but as the people cry out for help – the government (elected officials) are bound to try.
Reference Article: Blaming Free Market Capitalism
New Personal Finance Strategies
The new personal financial advice will be to move your money (what’s left) to non-dollar based assets or currencies that are not deflating like the dollar. Then, stay alert as to government actions and move your money around bases on their actions.
The actions of the government are likely to create the biggest advantages/disadvantages in the marketplace, which is why it will be critical to monitor their every move – as it has been for the last year already. If they create new regulations for large businesses (like price freezes), than move your investments to smaller businesses. If they lower the interest rates, than move your investments to commodities or foreign currencies. If they raise interest rates, than move your money to the banks that offer the highest interest rates.
These strategies will be valuable for the next decade as inflation becomes a major problem around the world, even if congress takes drastic action to stop inflation from becoming hyperinflation.
Reference Article: Congress Needs to Take Drastic Action