Who Benefits From Inflation?

Quinlyn Manfull
August 12, 2022

Consumers facing higher bills in almost every area of their life experience little benefit from inflation, but savvy investors can mitigate these losses by identifying sectors that may positively benefit from inflation.

For example, those invested in energy companies may benefit when they see a rise in energy stock prices due to increased gas prices. Read on to find out who typically wins during high inflation.

Inflation Winners

Borrowers with Existing Fixed-Rate Loans

The Federal Reserve often responds to high inflation with interest rate hikes in order to dissuade borrowing. In turn, this leaves plenty of current and future borrowers with less promising lending prospects — but for people who have already borrowed and are paying back low-interest loans with fixed rates, they are a definite winner of inflation.

Energy Sector

The energy sector is considered a defensive sector because consumers and producers need to purchase energy regardless of the effects of inflation. Energy provides essential services for both individual consumers and for major industries such as manufacturing.

Food and Agriculture Industry

While individuals may opt out of more expensive food options such as eating out, food manufacturers and the agricultural industry both benefit from inflation. Consumer staples such as food are defensive sectors during inflation because their products are always in demand. The food industry is able to grow along with inflation, meaning these companies are able to bring in more profit as inflation rises.

Along the same vein, agricultural companies that are vital to the production of food also benefit from higher prices. Investing in these stocks allows investors to take advantage of rising prices and capitalize on costs that are passed on to consumers.

Collectors

Historically, collectibles such as fine art, wine, or baseball cards have benefitted from inflationary periods as the dollar loses purchasing power. Investors in this period often turn to hard assets that are more likely to store value through market volatility.

Commodities Investors

Commodity prices track the inflation rate closely, they are often even considered indicators of inflation as they impact the future prices of processed goods.

Banks and Mortgage Companies

In general, lenders benefit from inflation when they issue new loans because inflation increases interest rates and simultaneously increases the need for loans. The Fed Funds Rate is the Fed’s most powerful inflation-fighting tool, as it impacts the interest rate for everything from mortgages to credit cards. Lenders are then able to increase the interest rates on existing variable rate loans like credit cards and adjustable-rate mortgages, allowing them to collect more interest. 

When consumer prices rise, people tend to spend down their savings and rely on credit to get by. This can mean higher credit card balances and more applications for personal loans, home equity lines and other types of credit, all of which is making banks and lenders more cash. 

Borrowers may also take longer to repay debt and the value of money decreases. They might need to spend more on necessities, which leaves less for saving or repaying debt. Lenders get more interest from borrowers who pay only the minimum payment each month. 

Inflation Losers

Renters

For homeowners, monthly mortgage payments generally stay the same during periods of high inflation unless property taxes increase or they have an adjustable rate-mortgage (ARM). However, for those of us still renting, we are not as fortunate. Once leases end, landlords can raise rent with little to no limit, depending on the local laws.

The July 2022 Consumer Price Index (CPI) report showed rent increasing by 6.3% annually, the fastest pace since 1986 and 0.7% higher than the June 2022 report. For residents of high cost of living cities such as New York City and San Francisco, the rent increases are even worse — the average monthly rent for an apartment in Manhattan surpassed $5,000 in July 2022 for the first time, a 29% annual increase.

Savers

While inflation is rising quickly, the Federal Reserve is rarely able to change interest rates fast enough to keep up, causing savers’ dollars to gradually lose purchasing power.

Source: St. Louis Fed FRED, Bureau of Labor Statistics, 1940-2022, as of 08/12/2022

The above graph shows the purchasing power of a US dollar indexed to the 1982 dollar. During periods of higher inflation, the value of the dollar falls — between 1940 and 1982, the value of one dollar fell 85% from 700 to 100.

Savers can help hedge against inflation if they can gain an interest rate higher than inflation for their savings accounts. However, this is not likely to happen when inflation is over 8% as it is in 2022.

Long-Term Bonds

In a high-inflation environment, fixed income prices often contract, especially as interest rates rise. Long-term bonds are the most impacted by rising interest rates due to the duration of the bond. If an investor is relying on coupon bond payments, they are going to lose out during periods of inflation.

Credit Card Borrowers

Most credit cards have a variable interest rate linked to a major index such as the prime rate. This means cardholders will experience quickly climbing rates and higher payments as interest rates rise.

General Economic Confidence

If you’ve opened any social media or news source in the last months, you’ve likely been flooded with commentary regarding current high rate of inflation. When inflation is high, markets tend to be volatile as consumers worry over the possibility of higher rates, a recession, or their own ability to pay their bills.

Uncertainty rises for consumers, banks, and companies alike. High inflation can create a reluctance to invest, which can in turn lead to lower economic growth and less job availability. Much of these impacts are simply caused by an individual lack of confidence in the future of the economy and can become a self-fulfilling prophecy.

Can Inflation Be Good For the Economy?

The Federal Reserve utilizes monetary policy to keep inflation in a target range – around 2%. Inflation is good when it is mild and consistent. The first reason is it increases short-term demand which keeps consumers buying because they would rather pay now than pay more for goods later. As a result, demand remains consistent and manufacturers and producers are able to continue profiting and hire more workers to meet demands.

Another reason inflation can be good for the economy is it removes the risk of deflation. Deflation refers to the economic situation where prices fall. When that occurs, consumers wait to see if prices will fall more before making purchases. This cuts back demand, making companies produce less, profit less, and in turn lay off workers.

Deflation can cause unemployment to rise, leading to wage decreases. If workers then have less money to spend, that reduces demand even more. For this reason, deflation is more harmful to economic growth than inflation.

How Does the Fed Maintain Low Inflation?

The central bank of the United States, the Federal Reserve, has a set official inflation target of 2%. This inflation targeting is for the core inflation rate, which removes volatile gas and food prices.

The Fed enacts monetary policy to keep inflation around the target range. Higher interest rates are implemented when inflation exceeds the Fed’s target, while interest rates are lowered when inflation is falling short.

When Is Inflation Bad For the Economy?

If inflation rises above 2%, it can become dangerous for consumers and businesses. Walking inflation refers to an annual inflation increase of 3-10%, while hyperinflation refers to out-of-control price increases, typically measuring more than 50% per month.

With inflation above 2%, consumers face higher prices in basically every area of their life. Inflation robs workers of their hard-earned dollars by stripping them of purchasing power and increasing the overall cost of living. If fewer consumers can purchase goods and services, or are going into debt in order to do so, while also not seeing an increase in real wages, fewer goods will need to be produced which will decrease production and profit for companies. Over time, this can often lead to a reduction in the workforce, increased unemployment, and overall economic contraction.

This material is provided for educational purposes only.  It is not intended to be investment advice.  Any examples discussed are purely hypothetical and do not reflect any actual investments. 


Quinlyn Manfull
Quinlyn Manfull is a a New York based finance writer covering alternative investments, crypto, and NFTs. Previously she worked as an Investment Analyst for HSBC Private Bank covering capital markets. Her byline has been featured in the Anchorage Daily News, and her university newspaper, The Willamette Collegian. Quinlyn earned a B.A. in Economics from Willamette University and holds her FINRA Series 7 License.