Most people consider inflation as a big problem and high inflation does have a bad impact on the overall economy. However, there are some financial benefits that you get either indirectly or directly because of inflation. Knowing the positive and negative effects of inflation can help you in adopting an investment strategy that will give you good returns irrespective of inflation.
The people who often benefit from inflation are existing borrowers. During a period of high inflation, the cost of credit goes up, but if you have already locked in your interest rate, you will be better off as compared to fresh borrowers. Those who have fixed rate debts like fixed rate mortgages would benefit from high rate of inflation.
This is because the real value of money has gone down so their repayments are of lesser value now, while their income may have grown in line with inflation. This also applies to auto-loan holders too who got loans at lower interest rates earlier.
Inflation is also beneficial for those who own real estate or other large assets. The value of assets in the secondary market increases because of inflation. But there is an exception to this rule. When the market of that asset crashes, like we saw in the housing market recently, then irrespective of inflation, the asset prices will decline. Those who hold shares of companies will also benefit from inflation for the same reason. The value of various other commodities such as gold also increases because of inflation and their owners become richer.
On the other hand, due to the decrease in the real value of money, those who have huge savings in cash suffer because of inflation. Fresh borrowers also suffer because if you have to take credit for house, cars or business, then you will have to pay higher interest rates. Those whose debts had variable rates will also have to make higher payments because rates will increase.
If you are retired and are relying on your retirement fund, you may find times difficult during inflation as the purchasing power of your fund money will go down. People who live on a fixed salary will also have a hard time because of price rise, unless their pay increases in line with inflation.
Overall, the economy suffers if the rate of inflation is too high. That is why it is one of the most important duties of the Federal Reserve to keep inflation in check.
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