In 2022, the inflation rate peaked at 9.1 percent. Although in August 2023 it was down to 3.7 percent, it’s starting to show signs of increasing since it was at 3 percent in June 2023. But the results of this have been higher grocery bills and gasoline purchases.
Inflation can hit many people hard. But there are aspects of inflation that benefit others. Who is hurt, and who prospers during inflationary times?
Losers:
People Who Save
Savers lose during inflationary times. That’s because when prices rise, money’s value falls. The Federal Reserve can’t change interest rates fast enough to catch up, so those who have saved all their lives can see their savings value wiped out by higher prices.The answer is to save in a high-yield savings account that hopefully can stay ahead of inflation.
Workers With a Fixed Wage and Retirees
If income stays the same, but prices go up, you lose. For example, if prices rise to 10 percent because of inflation, every dollar you earn is only worth $0.90. Your income is worth less, too.The people who lose the most live on fixed income or Social Security.
People With Variable Mortgage Rates
When inflation rises, the Federal Reserve often raises interest rates. This higher borrowing rate is detrimental to a borrower with a variable mortgage rate.They will see significant monthly payments increase just when their take-home pay’s value has plummeted.
Exporters of American Goods
Prices go up during inflationary times. This doesn’t just happen to American consumers but to worldwide customers.American goods become higher priced and possibly less competitive than other countries’ goods. The consequence is a decline in worldwide customers.
First-Time Homebuyers
Home prices can rise in inflationary times. This creates a problem for first-time homebuyers. They face the challenge of higher mortgage rates and the depreciation of their money’s value. That hefty downpayment saved with hard work may not be enough.Renters
Home owners with fixed-rate monthly mortgages stay the same during inflationary times. But that’s not the case with renters.
In 2022, rent increased by 6.3 percent annually. And once those rents increase, they don’t usually go back down. The bigger cities were worse, with New York City seeing a 29 percent annual increase.
Economic Confidence
High inflation creates volatile markets. People worry about higher rates and paying their bills. Uncertainty rises for others besides consumers. High inflation, with the interest rates that come with it, hampers investment. This leads to slower economic growth and fewer jobs available.Lack of confidence can be a fulfilling prophecy as consumers and businesses hunker down.
Winners:
Collectors
People who collect wine, fine art, baseball cards, etc., benefit as the dollar loses its purchasing power. Often, investors turn to hard assets during inflationary times because these assets are more likely to retain their value.Hard assets aren’t directly related to traditional markets, so they are safer from significant price fluctuations.
Energy Sector
People still need to buy gas. So even though prices are high, energy is in demand. Energy consumption seldom drops during inflationary times.Energy stocks tend to do well when inflation is high.
Commodities Investors
Real assets are favored when inflation runs hot. Gold is the first choice of many investors. Several mutual funds or exchange-traded funds (ETFs) hold gold. Some investors buy gold directly from bullion or coin dealers.Other commodities are agricultural products, copper, oil, gas, etc.
Inflation-Indexed Bonds
Although high inflationary periods hit bonds the hardest, inflation-indexed bonds work differently. One example of an inflation-indexed bond is the Treasury inflation-protected securities (TIPS).These bonds rise in correlation with the Consumer Price Index. That means that as inflation increases, so does the base value of the bond. When this happens, it earns a higher interest rate.
Governments With Debt
Governments like the United States can reduce the real value of their public debt during inflationary times. That’s because higher inflation reduces the real value of debt. Bondholders with fixed interest rates will see a fall in the real bond value. This makes it easier for the government to buy it back.Real Estate Investors and Landowners
Assets like land tend to hold their value or increase during volatile times. There is a demand for real estate, which can increase during inflation. This drives the price up.Landlords who own rentals tend to increase their rents. If they have a fixed mortgage, that means additional income.
Financial Institutions
A rise in interest rates affects everything from variable loans to credit card debt. Lenders can levy a higher interest rate on existing variable loans. This allows them to collect more.People spend their savings and are forced to use their credit card when prices rise. This means bigger credit card balances for financial institutions to apply interest to.
And, finally, borrowers take longer to pay back debt during inflationary times. This, too, allows the lender to garner more interest.
Inflationary Times Creates Winners and Losers
Not everyone loses when inflation is running hot. Although the value of wages and savings are reduced, some people are still earning on their investments. For every renter paying rent, a landlord is collecting it.The biggest loser is the lack of confidence permeating the American people.
The Epoch Times copyright © 2023. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
