How to Beat Inflation

September 28, 1964

I am frequently asked by correspondents what they can do personally to protect themselves against inflation. The question is difficult to answer, either specifically, by giving tips on individual stocks (which I would not dare to do), or even in general terms.

The nub of the problem is that inflation forces everyone to become a gambler. If a man puts his money in a savings bank or in a “safe” bond, and the inflation continues, he is a certain loser. He gets back the face value of his savings or his bonds in dollars, but the dollar will not buy as much as the dollars he saved or invested. Even since the end of World War II, in 1945, consumer prices have risen 72 percent, which means the purchasing power of the dollar has shrunk 42 percent since then.

The problem for the individual is that he can never be certain how much further the inflation is going to go or at what rate. Many people assume that the rate of future inflation can be calculated from the past rate of inflation. Even if this assumption were sound, which it is not, endless disputes are possible even about the rate of past inflation.

THE TAKE-OFF DATE

The rate since when? The take-off date has to be arbitrarily selected. As compared with ten years ago (1954), consumer prices have gone up 15 percent, which makes the rate of inflation, as measured by price changes, 1.5 percentage points a year. As compared with 1944, or twenty years ago, consumer prices have gone up 76 percent, or 3.8 percentage points a year. As compared with 1934, or 30 years ago, consumer prices have gone up 132 percent, or 4.4 percentage points a year.

Even if, by some amazing clairvoyance, you knew what the average rate of inflation was going to be in the next year or decade—i.e., how much the consumer index was going to rise—you would not necessarily know how this was going to affect the particular asset you held or were thinking of buying, whether General Motors shares, a house, or a Picasso.

A further problem would be to know how much the past inflation, or the expected future inflation, had already been reflected in, or “discounted” by, the present price of the asset you held or thought of buying.

And this brings us to the centrally important point that it is impossible for everyone to protect himself against the ravages of inflation. Those who gain must do so at the expense of others who lose. Those who are shrewd enough or lucky enough to buy stocks or other assets before they have risen in price to reflect the inflation, must gain at the expense of those who buy later; and still more at the expense of those who do not buy at all, but hold only money; and still more at the expense of those who buy at the top, when past or further inflation has been overdiscounted.

UNEVEN IMPACT

Every day during an inflation, schemes are put forward designed to protect everybody against it. All of them rest on delusion. The most popular is that of insisting that all wages and salaries be raised in direct proportion with the rise in the cost-of-living index. If this could work, it would benefit wage and salary receivers at the expense of all those dependent on other types of income. But it cannot work except on a limited and selective scale.

For inflation, if it operates in a free or relatively free market, always affects the prices of different commodities and services unequally. Let us assume, for simplification, that it sends up the prices of half of all commodities 20 percent and the rest not at all. Then the average price rise is 10 percent. The workers in the favored industries might be able to secure wage rises much greater than this. But if the unfavored industries were forced to pay a wage increase of 10 percent, most of them could not afford it. The result would be wholesale unemployment in those industries. If, in order to make the higher wage rates payable, the government increased the money-and-credit supply still further, the inflation would soon be off to an accelerating spiral. This is exactly how this device worked in the German inflation of 1923.

There is only one way to stop the injustices of an inflation. Stop the inflation itself.