Who Benefits From Inflation & How Can You Beat It?

Inflation occurs when the general price level of goods increases - causing consumers’ real wages to drop in value. 

Naturally, inflation scares consumers. 

But did you know that certain people benefit from inflation?

In this article, we’ll show you who benefits from inflation and who loses out. We’ll cover what causes inflation and show you other investments like fine wine that can help you beat rising price levels.

Who Benefits From Inflation?

Although inflation negatively affects most households, some individuals and companies benefit from every price increase. Let’s see who they are:

1. Fixed-Rate Borrowers

• Individual borrowers: If you have a fixed-rate mortgage in times of high inflation, you’re in luck! When borrowers obtain fixed-rate loans during low inflation periods, their loans become inflation-proof even when a price increase happens. 

Although they’re paying the same amount in installments, that money is worth less in higher inflation periods. Essentially, their loan amounts don’t increase with inflation - they actually decrease because the currency is devalued. 

• Business borrowers: Businesses that take loans on fixed interest rates during low inflation can also take advantage of the low price stability during inflationary periods.

Any business can mark up their prices to match the rising price levels and use that extra revenue to furnish their monthly payments. This helps minimize the negative effect of inflation on corporate profits.

2. Equity and Commodity Investors

Despite low economic growth rates, investors can benefit from inflation if they hold the correct stocks and commodities in their portfolios. 

• Equity investors: Putting your money in stocks is much better than holding cash during times of high inflation.

Why?

Share prices can increase when price stability is low. 

When inflation occurs, companies are forced to pay higher wages. This can take a hit on a company’s profit margins, so companies raise their prices to accommodate the higher wages while increasing corporate profits.

When corporate profits increase, so do stock prices. This helps investors get good returns on investment and beat inflation. 

• Commodity investors: Commodities like gold and other precious metals also have track records of being great hedges against ongoing and future inflation. When times are uncertain, people prefer putting their money in commodities since they don’t lose value during inflation. 

This increase in demand causes commodity prices (like gold and gas prices) to increase significantly during times of high inflation, benefiting commodity investors.  

3. Landowners & Real Estate Investors

The assets of real estate investors and landowners can appreciate significantly during high inflation.

Land is an asset that constantly appreciates in value because of its limited supply. Additionally, when inflation levels rise, most people flock to buy land because it retains value steadily.

This increased demand for real estate results in a stable stream of income for real estate investors and landowners - helping them beat the adverse effects of inflation. 

Now that we know who benefits from inflation, let’s see who stands to lose from inflationary pressure.

Who Loses From Inflation?

Generally, people who don’t earn a steady income can be vulnerable to higher inflation. Let’s take a look:

1. Retirees

While inflation can result in higher wages and reduce the burden on working households, people living on retirement income aren’t so lucky. 

Retirement funds are usually fixed and don’t accommodate the inflationary price increase trends. This means reduced real retirement income for retirees who possess cash or fixed-income securities like bonds.

However, social security recipients don’t have this issue since the United States Social Security Administration adjusts social security benefits for inflation (based on movements of the consumer price index.) 

2. Savers

Saving is often considered a great habit to build financial security, but people with a big savings account balance can lose out significantly during times of inflation. 

When inflation levels rise rapidly, interest rates struggle to keep up, and your savings account will often be netting negative real returns. 

A negative real return occurs when the inflation rate is higher than the nominal interest rate on the savings account balance - even when there is an interest income, your real purchasing power decreases due to the rising cost of living. 

Savers should instead invest in short-term securities and reinvest when interest rates are higher.

3. Variable-Rate Borrowers

When people and institutions spend credit card money, they often borrow at variable rates. 

These variable rates are beneficial when general interest rates are low. However, high inflationary environments force central banks such as the Federal Reserve to raise interest rates - thereby increasing the interest percentages of these variable rate loans. 

This reduces the purchasing power of borrowers since they have to make higher payments, often without any increases in their income. 

4. Fixed Wage Workers

Fixed-wage earners are one of the largest groups in the labor market that lose out from higher inflation. 

Fixed-rate workers don’t earn a variable income like salespeople, and most don’t have their wages pegged to an inflation index. While the absence of a variable component may appeal to those who want a steady salary, times of high inflation cause their real wages to decrease. 

This means that fixed-wage earners, especially those living on minimum wage, experience reduced purchasing power during higher inflation. 

Now let’s look at what causes inflation.

Types of Inflation

Here are the two main types of inflation: 

• Cost-push inflation: Therising cost of production primarily cause cost-push inflation. When raw materials and labor prices increase, increased consumer prices reflect these costs.
• Demand-pull inflation:When consumers experience their real wages increase, they spend more and increase demand across a wide range of products and services. This demand pushes goods to a higher price as supply weakens - leading to demand-pull inflation.

Now, let’s look at how Central Banks handle inflation.

How Does a Central Bank Tackle Inflation?

A central bank or reserve bank is the primary institution of a country responsible for monetary policy decisions that lead to economic growth. Central banks like the Federal Reserve use strategies such as inflation targeting to keep future inflation rates reasonable. 

When people have unfavorable inflation expectations due to rising price levels, the Federal Reserve introduces inflation targeting measures like a higher interest rate while advocating for lower government spending.

These strategies can help any reserve bank curb rising inflation rates, but too much inflation targeting can lead to a drop in economic growth as well as deflation.

5 Ways to Beat Inflation

Here are five investments that can help you beat the adverse effects of inflation:

• Collectibles like Fine Wine
• Equities
• Commodities
• Real Estate
• Treasury Inflation Protection Securities (TIPS)

1. Collectibles like Fine Wine

Fine wine is known to significantly increase in value over time - especially when consumer prices are rising. 

When United States inflation levels reached an all-time high of 7% in 2021, the Liv-ex 1000 increased by 12.23% - outpacing inflation. 

Fine wines are great long-term investments too! 

They’re produced in small quantities, so the supply reduces significantly with time. This scarcity can result in fine wine bottles fetching extreme prices in the secondary market.

And you don’t even have to be a wine expert to invest in fine wine. 

Just sign up on a wine investment platform like Vinovest to buy, store, and sell fine wine bottles from the comfort of your own home!

2. Equities

Equities are another great way to beat the harmful effects of rising consumer prices. 

The S&P 500 averaged returns of about 9.5% from 2001 to 2021. Comparing that to the average inflation rate of 2% shows that investors have received about 7% annual returns.

Long-term equity holders rarely incur losses, but during inflation, you need to pick stocks with pricing power - companies that can increase their prices during inflationary periods. 

3. Commodities

Commodities like gold and other precious metals provide investors with decent returns - but when higher inflation occurs, they outperform many other asset classes. 

Gold is also considered an alternative form of payment, especially in countries with weaker currencies and low price stability.

4. Real Estate

Real estate prices almost always increase with inflation, which benefits investors when the performance of other assets suffers due to inflation. 

You can get into real estate by purchasing a property directly or investing in Real Estate Investment Trust (REIT) shares. 

5. Treasury Inflation-Protected Securities (TIPS)

TIPS are bonds backed by the United States government. They help protect investors from rising general price levels.

TIPS are extremely safe instruments with a variable component that adjusts for inflation - but you can’t expect them to provide a return beyond inflation protection. For example, if the annual inflation is 5%, TIPS will only provide you with a return equivalent to or slightly above the inflation rate.

TIPS pay interest twice a year and have maturities of 5, 10, or 30 years.

Your Best Bet for Beating Inflation

Whether you’re a veteran or amateur investor, parking your cash in the correct investments is crucial during inflationary periods.

While focusing on a single asset class seems easier, you should ideally invest your money across various assets. 

Fine wine is a great asset class that produces an attractive return, provided you pick the correct bottles. 

But with Vinovest, you don’t have to do any of the hard work!

They’ll handle buying, selling, and storage while you relax at home and enjoy the returns on your investment.