Why inflation can be good for ordinary Americans and bad for the rich
But overall, inflation can actually be a good thing for many working-class Americans, especially those with fixed rate debt like a 30-year mortgage. This is because wages go up, which not only empowers workers, but also gives them more money to pay off their debts. In addition, in the case of a mortgage loan, your monthly payment will be the same but your house will increase in value.
And many of the people who take a bath when prices rise are high net worth individuals who own the vast majority of government bonds.
The problem is, you aren’t going to feel the rise immediately.
“There’s light at the end of the tunnel, it’s just that it might take a few years,” said Kent Smetters, professor of business economics at the Wharton School of Business.
How inflation favors debtors
The immediate benefits of inflation for ordinary people are less tangible than the drawbacks – you feel the sting of your grocery bill and the punch of filling your gas tank. Less palpable but still significant is the ever lower weight of your debt.
“If you borrow at a fixed rate, like a 30-year mortgage, you earn as inflation rises,” says Smetters. “We often think of a 30-year mortgage as a hedge against inflation.”
In other words, the cost of your mortgage remains stable, while the amount of money you have to pay for it increases. It’s not a perfectly timed event, of course: Wages don’t immediately increase with inflation, but they end up doing it, Smetters said.
Household incomes have been supported by government transfers such as stimulus payments and unemployment benefits. In the first eight months of 2021, personal income – which includes salaries earned and government payments – was 15% higher than it was in 2019, says Daniel Alpert, managing partner of Westwood Capital.
“It’s hundreds of billions of dollars … and it was already adding to a very high accumulated savings by households, which resulted from the fact that they had nothing to spend it on because everyone in 2020 was shut in.”
Losers of inflation
Another affected group is those exposed to government bonds – think of households with over $ 1 million who typically invest in both stocks and debt.
“Who are the ones going to be hurt by holding a lot of 10-year or even 30-year bonds? These are usually high-income households,” says Smetters. So they will lose with higher inflation. “
This is because those bondholders, who basically lend money to the government, will be paid back in money that has less purchasing power.
“We just don’t know which end is in place”
However, inflation has a sticky psychological side that makes it difficult to clearly define who wins and who loses. Because even though wages are rising and job growth is strong, Americans are disappointed with the state of the economy.
“The November fallout is named after inflation,” Wells Fargo economists said in a recent memo.
One in four respondents said inflation had made their standard of living worse. And half said they expected inflation to wipe out the wage gains they had been awarded over the past year.
“My feeling is that people are exhausted from the level of chaos we have, and inflation is a symptom,” said Wendy Edelberg, senior economics researcher at the Brookings Institution. “So we have the booming economy, but for how long is it going to grow, and for whom is it going to grow? And is it growing in a healthy way? is it increasing in an unhealthy way? “
Edelberg concluded: “Inflation looks like really hard evidence that we just don’t know what end is in place.”
– Anneken Tappe of CNN Business contributed to this article.