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Key Takeaways
- As inflation rises, it creates both winners and losers. Right now, it’s mostly losers.
- Inflation benefits those with fixed-rate, low-interest mortgages and some stock investors.
- Individuals and families on a fixed income, holding variable interest rate debt are hurt the most by inflation.
It’s no secret that rampant inflation has taken hold. With the Consumer Price Index, a commonly used measure of inflation, sitting above 8%, we’ve all noticed that prices are higher. Whether you’ve noticed a higher bill at the pump, in the grocery store, at the local pharmacy, spiking prices have us all on edge.
After all, higher prices can take a big toll on everyone’s budget. But when it comes to inflation, not everyone is worried about its impacts. In fact, some groups will benefit from the economic pressure of inflation.
Let’s explore how inflation impacts groups differently. Plus, what steps you can take to get on the winning side of inflation.
Who benefits from inflation?
Inflation doesn’t hurt everyone equally. And some even benefit from the rising prices. Here’s a look at the biggest winners and losers from inflation.
Stock investors
Prices for consumer goods don’t rise on their own. Instead, market factors push those costs higher. In order to cope with these rising costs, companies raise the prices of their goods and services to the end user.
In theory, these rising prices should lead to rising company value. If you are an investor in the stock market, you can take advantage of this rising value. Of course, rising company values don’t occur across all industries. But for many staple consumer goods, like food, company values tend to rise.
Mortgage holders with a low fixed rate
Borrowers that have locked in low-interest-rate loans are relatively shielded from the worst impacts of inflation. That’s especially true for holders of relatively large loans, like a mortgage.
The locked interest rate keeps your monthly housing payment steady. As the value of the dollar erodes, you’ll keep making the same payment. When compared to renters or homeowners with a higher interest rate, rising inflation won’t cut into your housing costs as much.
In fact, you’ll be using less valuable dollars to keep making the same housing payment. With that, your housing costs will be relatively cheaper over time compared to those without a low fixed-rate mortgage.
Additionally, homeowners are holding onto an appreciating asset. Hopefully, the value of your home will continue to rise over time.
Precious metal holders
Precious metals tend to hold their value in times of inflation. For example, the value of gold is relatively effective in keeping pace with inflation over long periods of time. However, there is a fair amount of volatility along the way.
As inflation kicks up, those holding onto precious metals are in a better position to keep the value of these investments. This contrasts with savers who have their dollars sitting in a bank account. Although they might not come out ahead of inflation, these investors might avoid its most destructive impacts.
Who does not benefit from inflation?
The impacts of this economic issue are mostly negative. Here’s who is hurt the most by inflation.
Consumers
As a consumer, inflation puts unwelcome pressure on your budget. With inflation increasing, purchasing power decreases. Ultimately, this means that consumers are stuck watching as the value of their dollar decreases. For you, this might mean your $200 grocery budget is no longer enough to keep your family comfortable.
Inflation can be especially painful if your income source is not keeping pace. If your job isn’t giving out cost of living raises, then you’ll essentially be earning less in purchasing power for the same amount of time and effort.
Retirees
Retirees, or anyone else living on a fixed income, are bound to feel the impacts of inflation the most. Unlike those still in the workforce, a retiree’s income doesn’t keep pace with rising wages. When costs soar, retirees are often stuck in a difficult position.
Savers
Saving is an important part of a bright financial future. But big-time savers are penalized by inflation’s tear through the economy. When savers tuck away their dollars, interest rates likely won’t be keeping up with inflation.
For example, you might find a 2% APY on a relatively good savings account. But when inflation is sitting above 8%, you are still stuck with the short end of the stick.
Of course, it’s better to save money than to fritter it all away. However, savers need to be aware of the pernicious powers of inflation. It’s often not enough to save for a bright financial future: prudent investing is another important way to better secure your future.
Borrowers with variable interest rates
With inflation on the rise, the Federal Reserve is likely to raise interest rates. In the first half of 2022, the Fed raised the federal funds rate several times. This started a domino effect of higher interest rates across all areas of the economy.
For borrowers carrying debt with a variable interest rate attached, that means borrowing costs are on the rise. Interest rates are rising for all variable interest rate loans. But those with credit card balances are most likely to feel the pain. That’s because credit card interest rates are notorious for being on the high side.
Unfortunately, these higher interest rates can put a big pinch on your budget. Depending on your situation, focusing on paying down your balances could be the right move. Or looking for a lower-interest-rate, fixed-rate loan might be worthwhile.
How to protect yourself from inflation
As discussed, there are winners and losers when it comes to inflation. And naturally, you want to position yourself to get on the winning side of this trend as it impacts the entire economy.
Here are some strategies you can implement to protect your finances from the negative impacts of inflation.
Avoid taking on debt with variable interest rates
If inflation continues to rise, the Fed will likely continue to raise interest rates. The goal of the higher interest rates is to slow down the economy and pull inflation back to the target rate of 2%.
But it might take some time for inflation to level out. If possible, avoid taking on debt with a variable interest rate attached. It’s possible that interest rates will continue an upward march that could wreak havoc on your finances.
Invest smart
Another way to protect your finances from inflation is to avoid holding too much of your assets in cash. Instead, find a way to invest your funds with the hopes of staying ahead of inflation.
When investing to keep pace with inflation there are a few options. In general, investing in stocks, precious metals, and commodities can help you keep the value of your portfolio intact.
As an investor, building out a portfolio with inflation in mind can take a lot of time and energy. After all, you’ll need to keep an eye on changing market conditions and all the available securities to make sure everything is optimized appropriately. But the good news is that you can skip the tedium by harnessing the power of AI.
Q.ai has developed an investment kit specifically designed to protect your portfolio from inflation. The Inflation Kit uses artificial intelligence to monitor the markets and make appropriate changes along the way. Some of the holdings within the kit include Treasury Inflation-Protected Securities (TIPS), commodities, and precious metals.
Summary
Inflation creates winners and losers within our economy. If you are reading this, you likely want to position your portfolio to get on the correct side of this economic sledgehammer.
Q.ai takes the guesswork out of investing. Our artificial intelligence scours the markets for the best investments for all manner of risk tolerances and economic situations. Then, it bundles them up in handy Investment Kits that make investing simple and – dare we say it – fun.
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