Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / Why Your Savings Account Is Losing To Inflation
Transcript
- Lucas: Look at the headline number from the latest CPI release last month. It came in at three hundred thirty-four point one, up slightly from three hundred thirty-two point eight. But if you strip out food and energy, that core CPI sat at three hundred thirty-seven point eight. That is the number that matters for your wallet because it reflects the persistent costs of services and goods you actually buy. Luna: Right, and with the Fed Funds effective rate sitting flat at three point six three percent, your average high-yield savings account is barely keeping pace, let alone beating it. You are essentially losing ground on a daily basis. Lucas: Exactly. Most people look at their bank statement and see green numbers going up. They think they are winning. But when you subtract that three point five percent inflation rate from a three point six percent return, you are left with a real return of roughly zero point one percent. That is not growth. That is just slow bleeding. Luna: It feels like we are stuck in this weird limbo where cash isn't safe anymore, but stocks feel too risky with the ten-year Treasury yield spiking to levels we haven't seen in nearly two decades. Lucas: That spike is the key context here. The ten-year breakeven inflation rate just ticked up to two point three four percent. Investors are demanding more compensation for inflation risk. This changes the entire calculus for anyone sitting in cash or short-term instruments. We need to talk about how to structure your portfolio so you aren't just waiting for the next rate cut. Luna: So the first step is admitting that 'safe' cash accounts are no longer safe stores of value? That is a hard pill for a lot of listeners to swallow. Lucas: It is hard, but it is true. Let's look at the PCE price index, which is what the Federal Reserve actually targets. The core PCE was at one hundred thirty point seven. When you combine that with the fact that the Interest on Reserve Balances is holding at three point nine percent, banks have plenty of incentive to pay you more, yet many are still lagging behind the actual cost of living increases. Luna: I have noticed my own checking account interest hasn't moved much despite the Fed keeping rates elevated. It feels like the transmission mechanism to consumers is broken. Lucas: The transmission mechanism works differently for institutions than it does for individuals. Banks are earning spread on their reserves, but they are competing for deposits. However, even if you find a twenty-five basis point bump, you are still likely underperforming real inflation if you stay purely in cash. We need to look at fixed income instruments that actually adjust for inflation. Luna: You mean TIPS? Treasury Inflation-Protected Securities? I know they exist, but they always seem complicated to explain to clients who just want simple interest. Lucas: They are simpler than people think. The principal value of a TIPS bond adjusts based on the Consumer Price Index. If inflation goes up, your principal goes up. At maturity, you get the adjusted principal back. It is a direct hedge. With core CPI showing such sticky service-sector inflation, these securities provide a mathematical guarantee that your purchasing power is preserved, regardless of what the Fed decides to do next. Luna: But don't those usually trade at a premium, meaning you might lose money if inflation drops unexpectedly? That seems like a risk in itself. Lucas: That is a valid concern. If deflation hits, yes, you could face a capital loss. But we are nowhere near deflation. We are in a regime where prices are rising steadily. For most investors, the risk of staying in nominal bonds or cash is far greater than the risk of TIPS. It is about matching your liability—your future cost of living—with an asset that grows alongside it. Luna: It really comes down to what you are trying to protect. If you are saving for a house in two years, maybe cash is okay. But for retirement or long-term wealth, cash is a liability. Lucas: Precisely. And this brings us to the broader market environment. With the S&P five hundred hovering around seven thousand seven hundred forty-three and the Nasdaq at twenty-seven thousand sixty-nine, equity markets are pricing in a soft landing. But for your personal balance sheet, a soft landing doesn't matter if your savings are evaporating. You need to build a fortress around your liquid assets. Luna: I like the fortress analogy. But building it requires knowing exactly which bricks to use. Are we talking about laddering TIPS? Or looking at corporate bonds? Lucas: Let's stick to the basics first. A TIPS ladder is a powerful tool. You buy bonds maturing in one year, three years, five years, and so on. As each bond matures, you reinvest it into a new long-dated TIPS. This locks in your real yield while protecting against unexpected inflation spikes. Given that the ten-year Treasury yield is at its highest in nearly two decades, the starting yield environment is actually quite favorable for this strategy. Luna: So we are getting paid to wait, and we are getting paid for inflation? That sounds like the best of both worlds, assuming the government honors the adjustments. Lucas: Assuming the government honors the adjustments. Which, historically, they have. It is a full faith and credit obligation. The risk is not default; the risk is opportunity cost if inflation crashes. But again, with the current trajectory of the PCE index, crashing inflation is not the base case. The base case is persistence. Luna: Okay, so before we dive deeper into the mechanics of building that ladder, I want to pause here for a second. If our money conversations have helped you think about a decision differently, consider supporting the show directly. We deliberately don't run ads on these episodes because we believe financial advice should be clean and unbiased. If you want to help keep Fexingo ad-free, the link is buy me a coffee dot com slash fexingo. Any amount helps us continue producing these deep dives without compromise. Lucas: Thanks for that. It means a lot. Now, let's get back to the mechanics. Once you have your TIPS foundation, you might look at diversifying into other inflation-resistant assets. Real estate investment trusts, or REITs, often have built-in rent escalators. Luna: Rent escalators sound great, but we saw earlier in the week that small-cap stocks in the Russell two thousand are down over one percent in the last five days. Commercial real estate is facing headwinds too. Lucas: That is true. Commercial real estate is struggling with high vacancy rates and refinancing risks at higher yields. But residential REITs, particularly those with strong lease renewal histories, can pass through inflation costs to tenants. It is a different dynamic than owning a single-family home, which has its own maintenance and liquidity issues. REITs offer liquidity and professional management. Luna: So you are suggesting a mix of government-backed inflation hedges and private market like exposure through public equities? That seems like a balanced approach for someone who wants to sleep well at night. Lucas: It is. And let's not forget commodities. Gold futures are currently trading around four thousand three hundred twenty-one dollars. While gold doesn't produce cash flow, it has historically maintained its purchasing power over very long time horizons. It is not a short-term trading vehicle, but as a component of a diversified portfolio, it acts as a insurance policy against currency debasement. Luna: Four thousand three hundred dollars for gold is certainly a record level. It shows that investors are nervous about the fiat system. Do you think that nervousness will translate into sustained demand for physical assets? Lucas: Nervousness drives demand. Whether it sustains depends on geopolitical factors and central bank buying. But for the average investor, allocating a small percentage to gold or broad commodity ETFs can reduce overall portfolio volatility during inflationary periods. It is about correlation. When stocks go down due to inflation fears, commodities often go up. It smooths the ride. Luna: Smoothing the ride is exactly what people are looking for right now. Everyone is tired of the rollercoaster. They want predictability. And predictability is hard to find when the Fed is holding rates steady at three point six three percent while prices keep climbing. Lucas: It is hard to find, which is why you have to create it yourself. You cannot rely on the market to deliver real returns automatically. You have to construct a portfolio that explicitly accounts for inflation. This means moving beyond the standard sixty-forty stock-bond split and incorporating assets that respond to price changes. Luna: So the takeaway is: stop treating cash as a permanent home. Treat it as a parking spot until you can move into instruments that actually grow with the economy. Lucas: Exactly. Cash is for liquidity, not for wealth preservation. If you have more than six months of expenses in cash, you are leaving money on the table. Move that excess into TIPS, dividend-growing equities, or other inflation-linked assets. Luna: And remember, this isn't about timing the market. It's about aligning your assets with your reality. If inflation is real, your assets should reflect that reality. Lucas: Well said. As we close out today, I want to leave you with this question. Look at your current holdings. How many of them would survive a period where inflation stays at three percent for another five years? If the answer is 'not many,' it might be time to start rebuilding. Luna: That is a powerful place to end. It shifts the focus from what the market is doing to what your money is actually doing for you. Thanks for listening.