The Hidden Tax - Inflation and how to stay ahead

Many individuals are concerned with how much federal or state taxes they are going to pay annually; but, another tax is hurting your wallet even more than the “Direct” taxes you pay. Inflation.

Inflation, often called a "hidden tax," erodes purchasing power as prices rise over time, effectively reducing the value of money without direct taxation. It’s driven by factors like government spending, money supply growth, supply chain disruptions, or demand surges. Central banks, like the Federal Reserve, aim to manage it, targeting around 2% annually, but higher rates can silently shrink savings and income. How Inflation Works as a Hidden Tax

• Reduces Real Wealth: $100 today buys less in the future as prices increase. For example, at 3% annual inflation, $100 loses about 26% of its value in 10 years.

• Hurts Fixed Incomes: Retirees or those on fixed salaries feel the pinch most, as their income doesn’t adjust to rising costs.

• Increases Costs Without Legislation: Unlike visible taxes, inflation doesn’t require policy approval, making it a subtle wealth transfer from savers to borrowers and governments (who can print money to cover debts).

Recent Context:

• U.S. inflation has fluctuated, with recent data showing CPI around 2.9% annually (July 2025, per web sources). Global events, energy prices, and monetary policy continue to influence rates. But, just about two years ago, CPI hit 9%.

Interactive data link for chart above

Strategies to Stay Ahead of Inflation

1. Invest in Assets That Outpace Inflation:

   • Stocks: Historically, equities (e.g., S&P 500) average 7-10% annual returns, outpacing inflation over time. Focus on diversified index funds or sectors like technology and healthcare.

   • Real Estate: Property often appreciates faster than inflation, and rental income can adjust to rising prices. REITs offer a liquid alternative.

   • Commodities: Gold, silver, or energy can hedge against inflation, though they’re volatile. Gold prices often rise during high-inflation periods.

2. Increase your income:

   • Seek raises or side hustles to keep income growing faster than inflation. One of the main thing a W-2 earner or 1099 earner can do is seek raises or seek new job that will provide them with a pay bump. Back in high inflations years of 2021-2023, we saw many individuals doing this to keep up with the inflationary market.

3. Raise Prices (Business Owners):

   1. As a business owner, one of the main ways you stay ahead of inflation is by raising prices. If your costs continue to go up; you must raise your prices to keep “real” profit the same.

4. Minimize Cash Holdings:

   • Cash loses value fastest during inflation. Keep only what’s needed for emergencies (3-6 months’ expenses) in high-yield savings accounts (currently offering 4-5% APY, per web data).

5. Leverage Debt Strategically:

   • Fixed-rate debt (e.g., mortgages) becomes cheaper in real terms as inflation rises, assuming income grows. Pay off high-interest, variable-rate debt first.

6. Inflation-Protected Securities:

   • TIPS (Treasury Inflation-Protected Securities): U.S. government bonds adjust principal with inflation, ensuring real returns.

   • I Bonds: Offer inflation-adjusted returns, though purchase limits apply ($15,000/year per person in 2025).

7. Control Spending:

   • Budget for essentials and cut discretionary costs. Buy in bulk or lock in prices for staples via subscriptions to hedge against price hikes.

8. Upskill for Higher Earnings:

   • Invest in education or skills that boost employability in high-demand fields (e.g., tech, healthcare), ensuring income growth outpaces inflation.

Practical Example: If inflation averages 3% annually, a $50,000 salary today needs to grow to ~$67,000 in 10 years to maintain purchasing power. Investing $10,000 in a diversified stock portfolio averaging 7% annual returns could grow to ~$19,672 in the same period, beating inflation’s erosion.

Overall, in context of how well your business is doing or how much your wages have increases, always try and look at it from an inflation adjusted viewpoint (Real income/wage). Inflation can be a silent killer or hidden tax.