Inflation affects us all — but it affects every one of us in a different way. Some people benefit from inflation, whereas others are hurt by it.
In this article, we’ll provide a breakdown of what inflation is, who the winners and losers are, and how the perception of inflation affects society at large. Finally, we’ll close with a lesson about inflation and an opportunity to protect your financial future.
What Is Inflation?
Inflation is defined as a decrease in the purchasing power of currency over time, leading to an increase in the cost of goods and services.
Inflation can be viewed in a positive or negative light, depending upon whether the person is winning or losing because of inflation.
The Winners: Who Is Helped by Inflation?
Let’s start with the good news: some parties benefit from inflation. In this section, we’ll talk about who wins during inflation and why they’re winners.
People with Fixed Repayment Plans
If you’ve gone into debt but have a fixed repayment plan, whether you’re a business or an individual, your new wages could make it easier to repay a loan.
However, this is only true if wages begin to increase at the same rate as (or more than) the cost of inflation. On average, wages tend to increase about 3% every year, so if the inflation rate is above the raise amount, this wouldn’t be considered a win.
Banks and Mortgage Companies
Inflation tends to create greater profit margins for banks. This is due to the fact that banks and mortgages have such low-interest rates. Lending rates tend to be higher than saving rates during times of high inflation.
Landowners and Those with Physical Assets
Physical wealth tends to retain its value over time, even with inflation. Good examples of physical assets include real estate, gold, and silver.
Real estate has a tendency to appreciate over time. In fact, real estate appreciates by 14.5% a year on average, due to renovations and maintenance. Those who own land are usually able to sell it for more than they bought it for, especially during times of inflation.
Since 2010, the average rate of appreciation for silver has been around 5.38% a year, although, in recent years, silver has depreciated (down to -6.84% in 2022).
Likewise, the return rate of gold reached nearly 25% in 2020, only to drop to -4.3% at the end of 2022. During times of high inflation, however, keeping a hold on physical assets is still one of the best ways to protect your wealth.
Governments with High Debt
When inflation is higher than anticipated, governments can reduce the value of their debt (at least, when measured as a percentage of GDP). Governments with high debt will often sell bonds in an attempt to pay off debt, and when there are high levels of inflation, those bonds become easier for the government to pay off.
That said, whatever gain that a government gets during inflation comes at the expense of those to whom they’ve sold bonds, making the winless impactful for the government overall.
The Losers: Who Is Hurt by Inflation?
Now, onto the bad news. There are several groups of people who are hurt by inflation, and some of them are listed below.
Those Who Save Money (At Low-Interest Rates)
If you save money over time, the value of your money will decrease due to inflation. Whether you save cash or hold savings at a low interest rate, you’ll lose out during times of inflation.
Considering how low-interest rates have been for the past several years, it’s very unlikely that you’d be able to find a financial institution that can provide you with a higher interest rate than the rate of inflation. This means that, by and large, savers will suffer from inflation.
Here are the numbers: from 1960 to 2021, the average inflation rate in the US has been 3.8% a year. Compare that to the average interest rate of banks, which only goes as high as 0.9% for money market accounts and as low as 0.03% for interest checking accounts. It’s clear that savers would have a hard time benefiting from inflation.
Those Who Live on Fixed Incomes
For those who live on fixed incomes, inflation can be an overwhelming challenge. Since the buying power of the dollar decreases over time, this means that those on fixed incomes (whether they be senior citizens or whether they are still in the workforce) will suffer to make ends meet.
Due to rising inflation costs, those on fixed incomes will see 3% less food, a decreased ability to pay utilities and be less likely to afford the roof over their heads.
The Economy at Large
High inflation rates create a feeling of scarcity among the general population. Banks, consumers, and businesses become more reluctant to spend money, worried that things will get worse before they get better. These feelings of uncertainty can reduce the growth of the economy and discourage businesses from hiring new employees.
At a time when those on fixed incomes may be looking for work, it can be harder to find. This is obviously an issue for the population at large.
US Exporters
If inflation rates in the US are higher than that of neighboring countries, the cost of goods will go up for us. Exported goods will be available from other countries at a lower price than what US-based exporters charge, and it’ll become more difficult for US exporters to sell their wares.
Anyone on a Variable Interest Rate
Variable interest rates are discouraged for a reason. During times of high inflation, those who chose a mortgage with a variable interest rate will see their mortgage rates spike due to increased borrowing rates.
The Perception of Inflation
Inflation affects everyone differently, but for those who are hurt by inflation, it can be especially grievous.
During the hyperinflation following WWI, the currency of the Weimar Republic was printed to the point where a loaf of bread, which cost 250 marks in January 1923, rose to the price of 200,000 million marks in November of 1923.
This led to public outrage and rioting as those who had saved money over several years found themselves unable to buy a simple cup of coffee. The rebellion quickly followed suit.
It’s not surprising that inflation would be so divisive, considering that there are winners and losers in each economy. It doesn’t feel fair to those who have worked to save their entire lives when others can achieve the same amount of money through bargaining for higher wages or by other means.
The Lesson of Inflation
Although inflation can be polarizing, there are means by which you can protect yourself from inflation. By investing in physical assets and utilizing good financial counsel, you can prepare for the future and minimize the losses of inflation.
You can position yourself as a winner by:
- Avoiding adjustable interest rates. By making sure your investments and borrowing come with a fixed interest rate, you protect yourself from inflation and make it easier to repay your debt.
- Investing in physical assets. Instead of saving up vast amounts of money, investing in physical assets (such as real estate, gold, and silver) will enable you to protect yourself from high inflation rates.
- Negotiating regular wage increases. Even during the hyperinflation that followed WWI in Germany, many workers were able to continue to make a living because they renegotiated their wages every day.
Contact us at Alpha Wealth Funds for a free review of your financial situation. We’ll go over your assets and liabilities and create a plan for you. We’d be happy to help plan for a future where you’ll be able to breathe easily, even in the midst of inflation.
Please feel free to reach out to me on this or any of your investment needs or questions. I may not always have the answers at my fingertips, but I promise I will get them for you. Jenny Bober
Founded in 2010, our services include boutique hedge funds, separately managed accounts, financial planning, estate & trust services, private placements, and in-house concierge services for high net worth individuals, families, and businesses.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. All investments involve risk including the loss of principal.