• James McGlynn CFA, RICP

Fending Off Inflation








I REMEMBER 40 YEARS ago listening to Salomon Brothers economist Henry Kaufman bemoaning government deficits and predicting higher interest rates as a result. We institutional investors would gather in a room to listen to his declarations through a “squawk box” intercom system—because conference calls weren’t yet a thing.

Federal Reserve Chair Paul Volcker was in the process of wringing inflation out of the financial system by raising the federal funds rate so high that investors would rather hold cash investments than spend money. For everyday investors, money-market mutual funds were the go-to investment. I would mail checks to Fidelity Investments, whose money fund yielded more than 15% while also offering complete liquidity. If short-term interest rates rose—which they did—I would earn even more. Stodgy bank accounts and certificates of deposit were no match.

Today, it seems Series I savings bonds are the modern-day equivalent of the 1980s money market fund. Even though buyers are limited to $10,000 per calendar year, the 7%-plus yield on offer seems as popular today as the money market funds of 40 years ago.

Many commentators also recommend Treasury Inflation-Protected Securities, or TIPS, as a great inflation hedge. But since the Federal Reserve purchased these bonds as part of its efforts at quantitative easing, they’re currently priced to return less than inflation, unlike I bonds, which should climb in lockstep with the Consumer Price Index.

What else can you do, besides buying Series I savings bonds, to protect yourself from inflation? Here are four other things I’ve done or plan to do.

First, I refinanced my mortgage with a 15-year loan at 2.375%. That rate is well below the inflation rate, plus I’ll be repaying the mortgage with depreciated dollars and the home itself should act as an inflation hedge. Since I refinanced, 15-year mortgage rates have jumped to 4.4%, but that’s still comfortably below the current 8.5% annual inflation rate.

Second, if interest rates continue to rise, I can buy more Series I savings bonds next year or I could buy one-year Treasurys. The latter currently yield 2%, but that should climb as the Federal Reserve raises short-term interest rates.

Third, I have another fixed-income investment—in the form of my whole-life insurance policy. The policy’s cash value is currently earning around 3.5%. As interest rates rise, the cash value won’t decline, unlike bond prices. In fact, with the insurance company able to invest at higher yields, I expect my cash value to start earning more than 3.5%. I prefer investments like Series I savings bonds, whole-life insurance and short-term Treasury notes to bond mutual funds, which own conventional bonds that could suffer big losses if interest rates continue to climb.

Finally, another excellent inflation hedge is Social Security, whose payments are tied to inflation. The cost-of-living adjustment for 2022 was 5.9% and there’s a good chance it’ll be even higher next year. I plan to wait to collect Social Security until age 70 so I maximize this inflation-protected stream of income. The larger my Social Security benefit, the more dollars I’ll receive with every cost-of-living increase.


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