Could a heat pump really save you money this winter?

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Thanks to money-saving incentives up to $8,000 courtesy of the Inflation Reduction Act, heat pumps are an increasingly appealing way for people in the U.S. to heat and cool their homes.

 

Despite the name, a heat pump can both heat and cool your home, taking the place of your furnace, air conditioner, or both. And because heat pumps don’t directly burn fossil fuels, installing one reduces both your carbon emissions and your monthly gas bill.

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So, should you buy a heat pump? Read on to find out.

First, what is a heat pump?

Most heat pumps look like a large air conditioning unit that is fixed to the outside of your home. The pumps have both an outdoor and an indoor component, and keep your home comfortable by moving warm air into your home in the winter — and out of your home in the summer.

What’s the difference between a furnace and a heat pump?

A heat pump doesn’t burn fuel to create heat like a furnace does, rather it moves heat from the outdoors into your home in the winter.

Do heat pumps work when it’s cold outside?

Most heat pumps extract heat either out of the air or out of the ground to heat a building. And, yes, heat pumps work even when it’s cold outside. One type circulates a refrigerant that’s colder than the outside air, allowing the pump to extract even the smallest amount of heat from the outdoors and transfer it into your home. So while they will work harder – and use more energy – in a place like Alaska versus Texas or Georgia, they can still collect heat in very cold temperatures. “The technology has come a long way in the past decade,” says Akin Olumoroti, who works on federal climate innovation for the Environmental Defense Fund.

 

“There are now heat pumps that can operate in temperatures as low as -10 degrees Fahrenheit.”

How do heat pumps save money?

Heat pumps don’t burn fossil fuels to create heat, so they reduce your monthly gas bill. This could be a big deal if, as projected, natural gas prices in the U.S. go up this winter. (Europeans have been buying more heat pumps than ever since the war in Ukraine disrupted their supply of Russian gas.)

Are heat pumps good for the environment?

Heat pumps are better for the environment because they do not directly burn fossil fuels to create heat. Gas or fuel oil used for heating, hot water and cooking makes up more than 10% of carbon emissions in the U.S. – with heating being the largest direct use of fossil fuels in buildings.

 

In contrast, an air-source heat pump can provide up to three times more heat than the electricity it consumes. That efficiency, combined with ongoing grid-wide improvements to greener energy sources, mean that over the life of your heat pump, your carbon footprint will be much lower than that of a traditional furnace.

CASE IN POINT

Alex DeGolia decided to install a heat pump not only to heat his home, but also to cool it during Colorado’s increasingly hot and smokey summers. (His house wasn’t built with central air conditioning.) “Our biggest concern was cost,” DeGolia says, which is why he recommends looking into local rebates for going green, in addition to taking advantage of the incentives in the Inflation Reduction Act. “We have a local energy cooperative that provides a rebate for heat pump installation so long as it displaces the majority of your existing fossil heating load,” he says. DeGolia also qualifies for a federal tax credit of $2,000 because the installation of his new heat pump will be completed in 2023.

Is the government tax break for installing a heat pump worth it?

If your furnace or air conditioner is nearing the end of its useful life – the answer is yes. Heat pumps are already cost-competitive with those systems and offer monthly energy savings.

 

Combined with the money-saving incentives included in the Inflation Reduction Act of up to $8,000 for low-income households and $2,000 for higher incomes, which start in 2023, getting a heat pump is both cost-effective and environmentally friendly.

To find out how much you could save, consult this online calculator.

I’m ready to buy a heat pump. What’s the first step?

You should first look for a reputable contractor who is familiar with heat pumps. Your electric utility company can likely provide a list of local names. The next step is to get several estimates to determine the right system for your situation. Depending on the size of your home, where you live and other factors, the most efficient type of heat pump will vary. (For example, some pumps are better for cold weather climates than others.) “You need a trained professional to do a proper evaluation of your home to make these determinations,” says Olumoroti.

 

This story is part of our Inflation Reduction Act and You series.

 

 

This article originally appeared on EDF.org and was syndicated by MediaFeed.org.

More from MediaFeed:

How to invest and profit during inflation

 

The inflation rate, or the rate at which prices are increasing, is going up in 2021, with the core U.S. inflation rate up to 5.4% in mid-2021. That’s a fairly big number, given the U.S. inflation rate stood at 1.4% only last January.

 

That has an impact on both consumers and investors. When inflation rises, consumer prices rise with it. Common goods like lumber, gasoline, semiconductors and grocery items like bacon and bananas have seen prices soar this year as a result of rising inflation, meaning that consumers’ paychecks might not go as far. If wages are rising at the same time as inflation, the impact on consumers is much less severe.

 

Rising inflation can also affect the stock market. Traditionally, rising inflation has tempered stock market growth, as consumers have less money to spend and the Federal Reserve may step in to check rising inflation by making loans and credit more expensive with higher interest rates.

 

What’s an investor to do when inflation is on the upswing? Often, it means adjusting investment portfolios to protect assets against rising prices and an uncertain economy.

 

Related: How can I invest $1,000?

 

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Inflation is largely defined as a continuing rise in prices. Some inflation is OK– historically, economic booms have come with an inflation rate at about 1.0%-to-2.0%, a range that reflects solid consumer sentiment amidst a growing economy. An inflation rate of 5% or more can be a different story, with higher rate levels associated with an overheated economy.

 

Inflation rates often correlate to economic growth, which is not always bad for consumers. When economic growth occurs, consumers and businesses have more money and tend to spend it. When cash is flowing through the economy, demand for goods and services grows and that leads food and services producers to raise prices. That triggers a rise in inflation, with the inflation rate growing even more as demand for goods and services outpaces supply.

 

Conversely, when demand slides and supply is in abundance, prices fall and the inflation rate tumbles as economic growth wanes. In 2021, however, the US economy is heating up after muted growth in 2020, and the inflation rate is on a significant upward trajectory.

 

In the United States, the main barometer of inflation is the Consumer Price Index (CPI). The CPI encompasses the retail price of goods and services in common sectors such as housing, healthcare, transportation, food and beverage, and education, among other economic sectors.

 

The Federal Reserve uses a similar index, the Personal Consumption Expenditures Price Index (PCE) in its inflation-related measurements. Economists and investors track inflation on both a monthly and an annual basis.

 

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Historically there are two types of inflation: cost-push inflation and demand-pull inflation.

 

 

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This type of inflation is an economic condition when goods and services are limited in supply, and where demand “pushes up” prices on those same goods and services. Take the cost of lumber in the first half of 2021, which was up substantially. Any increased price of lumber for building and construction leads to a lower lumber supply. With demand for lumber both sustained and intense, the price of lumber rises – or is “pushed” higher. Cost-push inflation also often occurs following a natural disaster (i.e., like when a hurricane closes oil refineries, leading to a lower supply of oil and gas, which leads to higher prices for both commodities.)

 

 

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This type of inflation occurs when prices rise in the consumer economy. When jobs are plentiful and consumer sentiment is high, or the government has pumped a large fiscal stimulus into the economy. People tend to spend more money on goods and services. Yet if the goods consumers are limited (such as smartphones or used cars), competition for those goods rises, and so do the prices for those goods.

 

Demand-driven inflation is often referred to as “too many dollars chasing too few goods,” meaning the competition among consumers for specific goods and services drives prices significantly higher.

 

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Inflation impacts both stock and bond markets but in different ways.

 

 

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Inflation has an indirect impact on stocks, primarily reflecting consumer purchasing power. When inflation rises, that puts pressure on stock market returns to keep up with the inflation rate. Consider a stock portfolio that earns 5% before inflation. Add the 5.4% inflation rate U.S. investors have seen (on average) over the past year, and the portfolio actually loses 0.4% on an inflation-adjusted basis. Plus, as prices rise, retail investors may have less money to put into the stock market, reducing market growth.

 

Conversely, some inflation stocks can perform well in periods of high inflation. When inflation hits the consumer economy, companies boost the prices of their goods and services to keep profits rolling, as their cost of doing business rises at the same time. Consequently, rising prices contribute to higher revenues, which helps boost the price of a company’s stock price. Investors, after all, want to be in business with companies that have strong revenues.

 

Overall, however, rising inflation raises the investment risk of an economic slowdown. That scenario doesn’t bode well for strong stock market performance, as uncertainty about the overall economy tends to curb market growth, thus reducing company earnings which leads to sliding equity prices.

 

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Inflation can crimp bond market performance, as well. Most bonds like US Treasury, corporate, or municipal bonds offer a fixed rate of return, paid in the form of interest or coupon payments. As fixed-income securities offer stable, but fixed, investment returns, rising inflation can eat it those returns, further reducing the purchasing power of bond market investors

 

 

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Investors can take several action steps to protect and potentially outperform with their portfolios during periods of high inflation. You don’t have to worry about choosing the best investments during hyperinflation, because it’s highly unlikely that runaway inflation will occur in the United States.

 

Choosing inflation investments is like selecting investments at any other time – you’ll need to evaluate the security itself, and how it fits into your overall portfolio strategy both now and in the future.

 

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For instance, investors might consider stocks where the underlying company can boost prices in times of rising inflation. Consider a big box store with a global brand and a massive customer base. In that scenario, the retailer could raise prices and not only cover the cost of rising inflation, but also continue to earn profits in a high inflation period.

 

 

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Think of a consumer goods manufacturer that already has a healthy portion of the toothpaste or shampoo market, and doesn’t need excess capital as it’s already well-invested in its own business. Companies with low capital needs tend to do better in inflationary periods, as they don’t have to invest more cash into the business just to keep up with competitors – they already have a solid market position and already have the means to produce and market their products.

 

 

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Treasury Inflation-Protected Securities can be a good hedge against inflation. By design, TIPS are like most bonds that pay investors a fixed rate twice annually. They’re also protected against inflation as the principal amount of the securities is adjusted for inflation, based on Consumer Price Index levels.

 

 

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Precious metals, oil and gas and orange juice can all be good inflation hedges as well. Most commodities are tied to the rate of inflation and can capitalize in high inflationary periods. Take the price of gasoline, which rises as inflation heats up. Businesses and consumers are highly reliant on oil and gas, and will likely keep filling up the tank and heating their homes, even if they have to pay higher prices to do so. That makes oil – and other commodities – a good portfolio component when inflation is on the move.

 

 

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By investing in short-term bonds and bonds funds, you’re not locked into today’s low rates for the long term. When interest rates rise, you can purchase new investments that reflect more favorable rates.

 

 

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Investors should proceed with caution when inflation rises. While low inflation can indicate a healthy economy, high inflation can be a precursor to a recession. Massive changes to a well-planned portfolio may do more harm than good, and you shouldn’t toss out a long-term investment plan shouldn’t be deep-sixed just because inflation is moving upward.

 

Learn more:

This article originally appeared on SoFi.comand was syndicated by MediaFeed.org.

 

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