Higher inflation: Winners and losers when prices rise

Prices are rising — even if inflation is not hitting multi-decade highs as it has recently..

By most measures, prices in 2021 rose by the fastest pace in 40 years. Then in 2022, inflation went higher still, peaking at 9.1 percent year over year in June 2022. That’s according to inflation indexes from both the Department of Commerce and the Department of Labor, which track how much prices are rising on the typical basket of goods and services that consumers purchase.

For the average American, the mere mention of “inflation” can stir up a panic. It conjures worries of a stagnating economy, rising prices and an income that just can’t keep up with the cost of living.

Yet, rising prices aren’t extraordinary, and experts say they should increase by a steady amount every year — a sign of a healthy, growing economy.

But the wallet-harming kind of inflation occurs when prices rise year-after-year across the board — and Federal Reserve officials have been sounding the alarm that higher prices are a threat to both employment and economic growth. To combat it, they’ve raised interest rates at one of the most aggressive paces ever, bringing short-term rates from near zero at the start of 2022 to a range of 5.0 to 5.25 percent by June 2023, just 18 months later.

While inflation has cooled from the heady days of mid-2022, it remains well above the Fed’s target of 2 percent. Worse, core inflation – that is, inflation excluding volatile food and energy prices – remains stubbornly high, despite the Fed’s double-barreled approach to raising rates.

Here’s what you need to know about the clear winners and losers of an inflationary environment.

Winners during higher inflation

1. Fixed-rate mortgage holders

Anyone with large, fixed-rate debts like mortgages benefit from higher inflation, says Mark Thoma, a retired professor of economics at the University of Oregon. Those interest rates are locked in for the life of the loan, meaning they won’t ebb and flow with inflation. Homeownership may also be a natural hedge against inflation, given that homes are considered an appreciating asset over time.

“They’re going to be paying back with devalued dollars,” Thoma says, referring to fixed-rate mortgage holders.

Property holders also won’t be exposed to rising rent costs during higher-inflationary periods.

2. Stockholders

Stockholders get some protection from inflation because the same factors that raise the price of goods also raise the value of companies. Meanwhile, companies can raise prices to shelter their profitability from inflation, but some firms have thinner profit margins, such as retail and restaurants.

The companies that fare the best are those that can raise their own prices and don’t have to reinvest in their own business at escalating prices. Think of a company with an already-constructed toll bridge that can raise prices but doesn’t need to build another bridge.

“Theoretically, the value of equities varies directly and proportionally with inflation,” Thoma says. “When you double all prices and wages, you double profits and you double the value of stocks, basically.”

3. Commodities investors

Commodity prices track the inflation rate closely, says Greg McBride, CFA, Bankrate chief financial analyst. Buying storable commodities such as gold can be a good hedge against inflation.

Gold is a popular hedge against inflation, and investors have a variety of ways to buy and sell it. The shiny stuff has a long track record of being a store of value, but other commodities can be especially volatile as inflation ebbs and flows. And of course, not all commodities are created equal, so they respond differently in a given inflationary environment.

Inflation’s many losers

1. Savers

In an economy where inflation is rising quickly, interest rates rarely keep up, causing savers’ hard-earned dollars to gradually lose buying power, McBride says. He suggests one way CD savers can fight this trend.

“You don’t want to be locked in long term at a low rate of return only to see inflation go racing past you,” says McBride.

Yet with CD rates at a relative high point and inflation on the downswing, it could be an opportune moment to lock in medium-term CDs, especially if inflation returns to the Fed’s target.

2. Retirees

A high inflation rate often means wage increases, but that won’t benefit those who are retired, McBride says. Their pots of retirement money are already mostly fixed. Price pressures could further harm retirees’ wallets if they have too much exposure to cash or fixed-income investments, such as bonds.

“Higher inflation erodes the value of the savings that you have,” he says. “When inflation goes up, it tends to accelerate a lot faster than interest rates can keep up, so it erodes the buying power not only of your existing savings, but anybody who’s relying on interest income or investment income, like retirees.”

That said, Social Security does rise in response to inflation, offering some relief to retirees.

3. Investors in longer-term bonds

In a high-inflation environment, “it’s on the bond side where there’s a lot more trouble,” Thoma says. “If you’re living off coupon bond payments, for instance, you’re going to lose when there’s inflation.”

And not only do those bond payments buy less due to inflation, the price of the bonds themselves also declines as interest rates rise. So bondholders get hurt two ways.

McBride says bond investors can hedge against inflation by favoring shorter-term bonds and inflation-indexed bonds. One option for individual savers is Series I bonds – here’s how they work.

4. Variable-rate mortgage holders

Homeowners with mortgage rates that aren’t fixed typically see their borrowing costs climb periodically along with the broader inflation in the economy, leading to larger payments and decreased affordability.

5. Credit card borrowers

Most credit cards have a variable interest rate tied to a major index, such as the prime rate. That means cardholders experience quickly climbing rates and higher payments in an inflationary environment. Every time the Fed ratchets up rates, rates on credit cards go along for the ride.

6. First-time homebuyers

McBride says people looking to save for their first home in the midst of a high inflation rate are confronted with quickly rising home prices, higher interest rates for mortgages and a relentless slide in the value of any money they’ve put away for a down payment.

It’s a triple whammy for those looking to get into their first home and move up a rung on the financial ladder.

Bottom line: Higher inflation can hurt the economy

Consumers and investors don’t have many places to hide from inflation, meaning it can pose dire consequences for the economy. The dollars that consumers have in their wallets can’t buy as much as they used to, meaning many people might decide to pull back on spending — especially if they don’t get a pay raise to counter higher prices. That could stifle demand, threatening business profitability and hiring.

Businesses and consumers are also getting hit by higher borrowing costs, as the Fed has rapidly raised interest rates. Higher borrowing costs make it more expensive to finance new businesses and homes, both of which are vital to a growing economy.

“If you look at periods of strong growth in U.S. history, the one constant has been a very modest rate of inflation over that time,” McBride says.