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Why inflation can actually be good for everyday Americans and bad for rich people

Why inflation can actually be good for everyday Americans and bad for rich people
Written by Publishing Team

But in general, inflation can be a good thing for many working-class Americans — especially those with fixed-rate debt like a 30-year mortgage. That’s because wages are going up, which not only empowers workers but also gives them more money to pay off debt. Additionally, in the case of a mortgage, your monthly payments will be the same but the value of your home will increase.

Many of the people who take a shower when prices are high are high net worth individuals who own the vast majority of government bonds.

The problem is that you won’t feel the upside right away.

“There is light at the end of the tunnel, it just might take two years,” said Kent Smitters, professor of business economics at the Wharton School of Business.

How does inflation favor debtors?

The immediate benefits of inflation for ordinary people are less realistic than the drawbacks – you feel the sting of your purchase bill and the power of filling your tank. The diminishing burden of your debt is less obvious but still significant.

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“If you’re borrowing at a fixed rate, like a 30-year mortgage, you’re a winner with inflation going up,” says Smitters. “We often think of a 30-year mortgage as an inflation hedge.”

In other words, the cost of the mortgage remains constant, while the amount of money you have to pay for it goes up. It’s not a perfectly simultaneous event, of course: Wages don’t rise immediately with inflation, but eventually they do, Smitters said.

Mortgages, the vast majority of which are 30-year fixed-term loans, make up roughly $11 trillion of America’s current record $15 trillion debt. Meanwhile, wages are rising along with prices, essentially reducing the real value of that debt. The same inflation benefits apply to anyone paying off federal student loans, which also have a fixed interest rate. As your income increases, you basically get a discount on what you have to pay back.
So far, broad-based wage growth has not kept pace with price increases, but analysts say that could change in the new year as shipping bottlenecks begin to ease.
A key measure of inflation rose to a 31-year high in October.

Household incomes were boosted by government transfers such as stimulus payments and unemployment benefits. In the first eight months of 2021, personal incomes — which includes earned wages and government payments — were 15% higher than they were in 2019, says Daniel Albert, managing partner at Westwood Capital.

“This is hundreds of billions of dollars… and it was already on top of the very high accumulated savings by families, which was the result of not having anything to spend on it because everyone in 2020 got locked out.”

Inflation losers

Of course, not all debt shrinks with inflation. Credit card interest rates, which are largely unfixed, have risen this year to an average of 17.13%, just below the record high of 17.14% reached in 2019, according to the Federal Reserve. And anyone who lives on a fixed income, such as retirees, who don’t benefit from the wage increases people are seeing in the workforce, feels additional pain as prices go up.
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Another group that gets hit are the people who handle government bonds – think of households with more than $1 million that typically invest in both stocks and debt.

“Who are they going to be hurt by holding a lot of 10-year or even 30-year bonds? So they’re going to lose out as inflation goes up,” says Smitters.

That’s because bondholders, who mainly lend money to the government, will be repaid with money with less purchasing power.

“We just don’t know where it ends”

However, there is a sticky psychological aspect to inflation, which makes it difficult to clearly identify winners and losers. Because despite rising wages and solid job growth, Americans are concerned about the state of the economy.

The Consumer Confidence Index fell to its lowest level in a decade in early November, according to data compiled by the University of Michigan.

“The November fallout is written in the name of inflation,” Wells Fargo economists said in a recent note.

How does inflation affect the standard of living?

One in four people surveyed said that inflation had worsened their living standards. Half of them said they expect inflation to wipe out their wage gains over the past year.

“My sense is that people are overwhelmed by the level of chaos we’re in, and inflation is a symptom,” said Wendy Edelberg, senior fellow at the Brookings Institution. “So we have the economy picking up, but how long is it going to go up, and for whom is it going up? And is it going up in a healthy way? Is it picking up in an unhealthy way?”

“Inflation seems to be just really concrete evidence that we don’t know where it ends,” Edelberg concluded.

Anneken Tappe of CNN Business contributed to this article.

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