How To Beat Inflation

How do you deal with inflation and price increases? I've noticed quite a few price hikes over the past several months across the consumer marketplace: in the grocery store, on the menus at local restaurants, in the costs of various services... the list goes on. Some examples from our household:

* Our cable company hiked our internet bill 9%.
* Many product categories in our primary local grocery store have seen price hikes: a few that come to mind: store brand peanuts $2.49 to $2.99 (20%) and then to $3.29 (32% cumulatively), soy milk: 33% ($1.50 to $1.99). pineapples 20% ($2.50 to $2.99).
* Our automobile insurance bill went up a surprise 10% in the last billing cycle.
* Our townhouse community fees increased about 5% last year.
* And our property taxes jumped 8% two years ago as our town put through new assessments.

Of course, let's not forget one of the worst examples of inflation today: increases in health insurance policy premiums, which seem to inflate at a shocking rate each year.

All of this made me want to attempt to collect and organize my thoughts for readers on how best to deal with inflation and price increases. Unfortunately, I can't solve the inflation problem directly, that's the job of all those stone-handed economic geniuses at the Federal Reserve. Bitcoin solves this! But I what I can do is share some heuristics and general principles to help us blunt inflation's impact on our household budgets.

Let's start by stealing a quote and a conceptual framework on inflation from economist John Kenneth Galbraith, from his book The Affluent Society:

"Those individuals and groups will suffer most which have the least control over their prices or wages and hence the least capacity to protect themselves by increasing their own returns."

Galbraith ain't the greatest writer in the world, but what he's trying to say here is you want to increase your flexibility on both sides of the ledger--with both income and expenses. Those households without much room between income and expenses, those carrying high fixed costs, those that can't (or won't) save aggressively, and those unable to control their incomes at least to some extent--it's those households inflation hurts the worst.

Don't be that kind of household. To ensure your family isn't like the "at-risk" example Galbraith describes, you'll want to add to your income, cut expenses, and beat price hikes where you can. All three--at the same time.

Okay. Let's move from the theoretical and get into some practical ideas.

The ability to say no
The things we buy in life can be broken down into two categories: things we need and things we don't. Many posts here at Casual Kitchen address how easy it is to confuse needs with wants, and inflation in the price of a given product or service gives us a way to clarify the confusion. The more you can consider something as a want rather than a need, and the more you can simply say "no" to that product or service, the more power you have over the entity selling to you.

Some of our peers tell us they could never part with television. Now, I never judge peoples' horrible media consumption habits, but if that's your position, guess what? To the extent you believe TV is a "need" you lose all your leverage. You lose the ability to use true brinkmanship with the supplier. Yes, you can use all the Ramit cost-savings scripts you like. But if you won't cancel service when it really gets down to it, the company holds all the cards, not you.

Eventually, you're going to eat a price hike.

In contrast, imagine a household that places cable television in the "want" rather than "need" category. In our case, that simple act of mental categorization at first enabled us to keep cable, as the cable company, smelling our utter indifference when we called to challenge a price hike, offered us a hilariously cheap deal. Ironic.

But eventually, as with all monopoly- or oligopoly-provided services (more on this in a moment) the price hikes inevitably resumed, and we simply eliminated the entire cost category from our life. We won the brinkmanship battle because we could always say no. And eventually we did. The more you can improve and expand your ability say no, whatever the product or service, the more power you have over inflation.

Sounds easy, right? The problem, of course, is sometimes there's no competition at all.

Monopoly providers
In our community, internet service is a monopoly, and--no surprise--they've put through multiple price increases in recent years. They do it because they can. It's a reality. We've managed to negotiate the last few away, but this summer they put through a 9% hike that we were unable to beat back.

Unfortunately, some price hikes you just have to eat, and we'll be eating this one. You won't be able to beat back every single manifestation of inflation. Instead, you'll have to make room for the ones you can't beat back by driving down costs elsewhere in your budget.

Oligopoly providers
Oligopolies are markets where there are very few players competing. Here's where we often see creeping inflation and the dreaded "pricing umbrella," where the most dominant company in an oligopoly hikes prices and the other competitors follow along. It's not collusion exactly. It's not like these companies get together in a smoky back room and agree to hike prices in advance (which is illegal). They are, however, still free to watch each others' pricing decisions in the open market, and either follow along or not.

Branded consumer products companies tend to be worst offenders here, which is why you want to try and both avoid their products and invest in their stocks. More on that next week in part two of this post.

Substitution/Competition: broadening our primary weapon
It's an elementary economic concept to know that the more competition there is in a market, the lower prices will be, and the less likely there will be inflation. I wouldn't be teaching you anything by telling you this--you already know it.

What I want readers to do instead is to view "competition" as broadly as possible in all consumer marketplaces.

Branding is one way companies try to artificially limit competition. If you only buy Bumblebee Tuna for example, you're enabling a type of mini-monopoly market, and setting up a possible pain point for inflation in the future. On the other hand, if you know the real truth about canned tuna, and thus are indifferent to branding, you can switch.

And the ability to switch or substitute is a consumer's primary weapon of empowerment. The question is, can we think about substitution in ridiculously broad terms, and impose more competition across more markets--and thus increase our overall power as consumers?

Let's go over an example of what I mean. One of the most basic substitution examples, one you'd find in an introductory economics textbook, is the idea of substituting chicken for beef based on whichever meat is least expensive. But Casual Kitchen readers steeped in the practice of almost meatless cooking should be able to broaden the substitution possibilities far, far further, by rotating in laughably cheap vegetarian meals for some meat-centered meals.

If you think about it, this makes meat providers "compete" far more expansively. They're not just competing against other meat providers, we're making them compete against vegetables too! In other words, you've created circumstances where all of these food providers have to compete against each other for your food dollars. And this gives you more options and flexibility than ever.

Interestingly, one of the primary flaws in measuring inflation decades ago resulted from the government failing to take into account the substitutability of many products in the consumer marketplace. Heh. We won't be making that mistake.

Substitution and competition can be thought of still more broadly, at all levels of the consumer marketplace. For example, think beyond the mere product level. Competition and substitution can be found at the store level too: If any store hikes prices beyond what you think is reasonable, go to another store.

So, we now have our first set of weapons for combating inflation, and here's the general heuristic for readers: source as many of your "needs" from markets that are competitive, and for each need, have as many substitution possibilities as you can, in as broad a sense as you can. To the extent you can expand the envelope of competition and substitution across all things you buy, you will massively increase your leverage and flexibility over price inflation.

Next week we'll look at still more ways to beat inflation in Part 2: we'll look at the issue from the income and employment side of the ledger, and we'll consider some unusual ways to think about overhead and investing. Stay tuned!