- For the wealthy and affluent, inflation means rising interest rates, which raise borrowing costs and put downward pressure on asset values.
Is inflation more harmful to the wealthy or the poor?
Inflation has a wide range of consequences. It’s impossible to say whether inflation impacts some income groups more than others. Nonetheless, it is apparent that inflation is a serious issue for the poor.
Is it possible to become wealthier as a result of inflation?
Inflation has the effect of making people poorer. Some people view inflation as terrible news because they do not understand how to use it to increase their wealth. Inflation, on the other hand, makes them poorer.
How can inflation cause poverty?
Poverty is a direct product of the current social and economic system and policies, and excessive inflation exacerbates poverty’s effects.
In January 2020, inflation reached 14.6 percent, the highest level in a decade. Food inflation in urban areas grew by 19.5 percent year over year and 2.7 percent month over month in January, while it increased by 23.8 percent and 3.4 percent in rural areas, respectively. Food inflation is quite high in rural areas, where the majority of the population resides, according to these figures.
Poverty is a calamity. Since the current government gained power in August 2018, more than half a million individuals have been pushed into poverty on a monthly basis.
Poverty prevents people from acquiring the nutrition, sanitary living circumstances, good housing, education, and basic healthcare that they need. People in poverty are forced to focus solely on obtaining bread and butter. Because of poor living situations, they are unable to think beyond their immediate demands.
Living in poverty is a constant battle against the odds. Poverty drives talented aspiring artists, musicians, poets, writers, experts, and vocalists to forego their dreams and personal ambitions in order to make ends meet.
When their bellies are empty, they can’t enjoy music, sports, or other forms of entertainment. They are continually brutalized and dehumanized due to their lack of access to the finer components of human life. As we can see nowadays, entertainment is not a luxury enjoyed by a select few, but rather a fundamental element of human civilisation and culture.
Poor people’s artists, musicians, painters, and authors are never given the chance to express themselves. Poverty prevents them from expressing themselves artistically. They have the potential to thrive if given the chance. A social revolution does this. That is exactly what Europe’s and North America’s capitalist revolutions accomplished. And the socialist revolution in Russia did it far more profoundly and on a much larger scale. Books have been written and films have been made. All of the performing arts thrived, and they were all performed by regular men and women.
When excessive inflation is combined with poverty, the situation becomes intolerable. Life becomes increasingly depressing and terrible. For the poor, high inflation is like adding insult to injury. Millions of people are now suffering from an even more severe form of poverty, which is on the rise.
The government appears impotent and oblivious to the rising inflation and poverty levels. It also refuses to acknowledge the plain fact that high inflation and poverty are the result of its neoliberal economic policies and IMF-imposed conditions.
Leaders of the PTI continue to criticize previous regimes for rising inflation and poverty. And they are unwilling to abandon their blame-the-others strategy in favor of confronting reality. The PTI government should finally realize that blaming previous political governments for their “corrupt” behavior is no substitute for addressing the persistently rising inflation that is directly affecting people. In truth, the administration signed the IMF rescue agreement with the most stringent and onerous conditions.
The government is now putting these conditions into effect, both in letter and spirit. The IMF is pleased, but the poor are paying the ultimate price for these neoliberal policies and conditionalities. Heartless technocrats and elite rulers have no understanding how their economic policies are harming millions of poor and middle-class people.
The government refuses to acknowledge that it is following the same economic policies that have led us to this point. Debt continues to climb; inflation is at an all-time high; unemployment is rising; and living costs are rising.
To boost revenue, the government is sticking to its policy of imposing indirect taxes. That is precisely what prior governments have done. Indirect taxes always contribute to rising inflation and impose an additional burden on the poor.
When our country’s prime minister is so convinced and convinced that Pakistanis do not pay taxes, charging higher taxes is not a problem. Then it would seem reasonable to raise utility prices as well. Our Oxford-educated prime minister has been informed this by Harvard and IMF experts. As a result, he is deafeningly deafeningly deafeningly deafeningly deafeningly deafeningly deafeningly deafeningly deafeningly deafeningly deaf
Direct taxation and progressive tax systems are highly opposed by the elite and governing classes. Because the top 10% of the population owns the majority of the wealth and means of production (industries, land, and services), they are responsible for the majority of the taxes. A welfare state raises taxes on the wealthy and big business and spends the money on the poor, providing them with free health care, education, good housing, transportation, and other less expensive services and utilities.
However, under the PTI’s welfare state model, the vast majority of the country’s wealthiest 10% remain untaxed. Taxes are paid by middle-class, high-wage earners. As a result, continuing with current regressive tax policies is a simple way to boost income.
To raise additional funds, previous governments imposed taxes and surcharges on electricity, gas, and gasoline. This administration is pursuing the same path.
Who is the hardest hit by inflation?
Inflation is defined as a steady increase in the price level. Inflation means that money loses its purchasing power and can buy fewer products than before.
- Inflation will assist people with huge debts, making it simpler to repay their debts as prices rise.
Losers from inflation
Savers. Historically, savers have lost money due to inflation. When prices rise, money loses its worth, and savings lose their true value. People who had saved their entire lives, for example, could have the value of their savings wiped out during periods of hyperinflation since their savings became effectively useless at higher prices.
Inflation and Savings
This graph depicts a US Dollar’s purchasing power. The worth of a dollar decreases during periods of increased inflation, such as 1945-46 and the mid-1970s. Between 1940 and 1982, the value of one dollar plummeted by 85 percent, from 700 to 100.
- If a saver can earn an interest rate higher than the rate of inflation, they will be protected against inflation. If, for example, inflation is 5% and banks offer a 7% interest rate, those who save in a bank will nevertheless see a real increase in the value of their funds.
If we have both high inflation and low interest rates, savers are far more likely to lose money. In the aftermath of the 2008 credit crisis, for example, inflation soared to 5% (owing to cost-push reasons), while interest rates were slashed to 0.5 percent. As a result, savers lost money at this time.
Workers with fixed-wage contracts are another group that could be harmed by inflation. Assume that workers’ wages are frozen and that inflation is 5%. It means their salaries will buy 5% less at the end of the year than they did at the beginning.
CPI inflation was higher than nominal wage increases from 2008 to 2014, resulting in a real wage drop.
Despite the fact that inflation was modest (by UK historical norms), many workers saw their real pay decline.
- Workers in non-unionized jobs may be particularly harmed by inflation since they have less negotiating leverage to seek higher nominal salaries to keep up with growing inflation.
- Those who are close to poverty will be harmed the most during this era of negative real wages. Higher-income people will be able to absorb a drop in real wages. Even a small increase in pricing might make purchasing products and services more challenging. Food banks were used more frequently in the UK from 2009 to 2017.
- Inflation in the UK was over 20% in the 1970s, yet salaries climbed to keep up with growing inflation, thus workers continued to see real wage increases. In fact, in the 1970s, growing salaries were a source of inflation.
Inflationary pressures may prompt the government or central bank to raise interest rates. A higher borrowing rate will result as a result of this. As a result, homeowners with variable mortgage rates may notice considerable increases in their monthly payments.
The UK underwent an economic boom in the late 1980s, with high growth but close to 10% inflation; as a result of the overheating economy, the government hiked interest rates. This resulted in a sharp increase in mortgage rates, which was generally unanticipated. Many homeowners were unable to afford increasing mortgage payments and hence defaulted on their obligations.
Indirectly, rising inflation in the 1980s increased mortgage payments, causing many people to lose their homes.
- Higher inflation, on the other hand, does not always imply higher interest rates. There was cost-push inflation following the 2008 recession, but the Bank of England did not raise interest rates (they felt inflation would be temporary). As a result, mortgage holders witnessed lower variable rates and lower mortgage payments as a percentage of income.
Inflation that is both high and fluctuating generates anxiety for consumers, banks, and businesses. There is a reluctance to invest, which could result in poorer economic growth and fewer job opportunities. As a result, increased inflation is linked to a decline in economic prospects over time.
If UK inflation is higher than that of our competitors, UK goods would become less competitive, and exporters will see a drop in demand and find it difficult to sell their products.
Winners from inflation
Inflationary pressures might make it easier to repay outstanding debt. Businesses will be able to raise consumer prices and utilize the additional cash to pay off debts.
- However, if a bank borrowed money from a bank at a variable mortgage rate. If inflation rises and the bank raises interest rates, the cost of debt repayments will climb.
Inflation can make it easier for the government to pay off its debt in real terms (public debt as a percent of GDP)
This is especially true if inflation exceeds expectations. Because markets predicted low inflation in the 1960s, the government was able to sell government bonds at cheap interest rates. Inflation was higher than projected in the 1970s and higher than the yield on a government bond. As a result, bondholders experienced a decrease in the real value of their bonds, while the government saw a reduction in the real value of its debt.
In the 1970s, unexpected inflation (due to an oil price shock) aided in the reduction of government debt burdens in a number of countries, including the United States.
The nominal value of government debt increased between 1945 and 1991, although inflation and economic growth caused the national debt to shrink as a percentage of GDP.
Those with savings may notice a quick drop in the real worth of their savings during a period of hyperinflation. Those who own actual assets, on the other hand, are usually safe. Land, factories, and machines, for example, will keep their value.
During instances of hyperinflation, demand for assets such as gold and silver often increases. Because gold cannot be printed, it cannot be subjected to the same inflationary forces as paper money.
However, it is important to remember that purchasing gold during a period of inflation does not ensure an increase in real value. This is due to the fact that the price of gold is susceptible to speculative pressures. The price of gold, for example, peaked in 1980 and then plummeted.
Holding gold, on the other hand, is a method to secure genuine wealth in a way that money cannot.
Bank profit margins tend to expand during periods of negative real interest rates. Lending rates are greater than saving rates, with base rates near zero and very low savings rates.
Anecdotal evidence
Germany’s inflation rate reached astronomical levels between 1922 and 1924, making it a good illustration of high inflation.
Middle-class workers who had put a lifetime’s earnings into their pension fund discovered that it was useless in 1924. One middle-class clerk cashed his retirement fund and used money to buy a cup of coffee after working for 40 years.
Fear, uncertainty, and bewilderment arose as a result of the hyperinflation. People reacted by attempting to purchase anything physical such as buttons or cloth that might carry more worth than money.
However, not everyone was affected in the same way. Farmers fared handsomely as food prices continued to increase. Due to inflation, which reduced the real worth of debt, businesses that had borrowed huge sums realized that their debts had practically vanished. These companies could take over companies that had gone out of business due to inflationary costs.
Inflation this high can cause enormous resentment since it appears to be an unfair means to allocate wealth from savers to borrowers.
What impact does inflation have on investments?
Most individuals are aware that inflation raises the cost of their food and depreciates the worth of their money. In reality, inflation impacts every aspect of the economy, and it can eat into your investment returns over time.
What is inflation?
Inflation is the gradual increase in the average cost of goods and services. The Bureau of Labor Statistics, which compiles data to construct the Consumer Price Index, measures it (CPI). The CPI measures the general rise in the price of consumer goods and services by tracking the cost of products such as fuel, food, clothing, and automobiles over time.
The cost of living, as measured by the CPI, increased by 7% in 2021.
1 This translates to a 7% year-over-year increase in prices. This means that a car that costs $20,000 in 2020 will cost $21,400 in 2021.
Inflation is heavily influenced by supply and demand. When demand for a good or service increases, and supply for that same good or service decreases, prices tend to rise. Many factors influence supply and demand on a national and worldwide level, including the cost of commodities and labor, income and goods taxes, and loan availability.
According to Rob Haworth, investment strategy director at U.S. Bank, “we’re currently seeing challenges in the supply chain of various items as a result of pandemic-related economic shutdowns.” This has resulted in pricing imbalances and increased prices. For example, due to a lack of microchips, the supply of new cars has decreased dramatically during the last year. As a result, demand for old cars is increasing. Both new and used car prices have risen as a result of these reasons.
Read a more in-depth study of the present economic environment’s impact on inflation from U.S. Bank investment strategists.
Indicators of rising inflation
There are three factors that can cause inflation, which is commonly referred to as reflation.
- Monetary policies of the Federal Reserve (Fed), including interest rates. The Fed has pledged to maintain interest rates low for the time being. This may encourage low-cost borrowing, resulting in increased economic activity and demand for goods and services.
- Oil prices, in particular, have been rising. Oil demand is intimately linked to economic activity because it is required for the production and transportation of goods. Oil prices have climbed in recent months, owing to increased economic activity and demand, as well as tighter supply. Future oil price rises are anticipated to be moderated as producer supply recovers to meet expanding demand.
- Reduced reliance on imported goods and services is known as regionalization. The pursuit of the lowest-cost manufacturer has been the driving force behind the outsourcing of manufacturing during the last decade. As companies return to the United States, the cost of manufacturing, including commodities and labor, is expected to rise, resulting in inflation.
Future results will be influenced by the economic recovery and rising inflation across asset classes. Investors should think about how it might affect their investment strategies, says Haworth.
How can inflation affect investments?
When inflation rises, assets with fixed, long-term cash flows perform poorly because the purchasing value of those future cash payments decreases over time. Commodities and assets with changeable cash flows, such as property rental income, on the other hand, tend to fare better as inflation rises.
Even if you put your money in a savings account with a low interest rate, inflation can eat away at your savings.
In theory, your earnings should stay up with inflation while you’re working. Inflation reduces your purchasing power when you’re living off your savings, such as in retirement. In order to ensure that you have enough assets to endure throughout your retirement years, you must consider inflation into your retirement funds.
Fixed income instruments, such as bonds, treasuries, and CDs, are typically purchased by investors who want a steady stream of income in the form of interest payments. However, because most fixed income assets have the same interest rate until maturity, the buying power of interest payments decreases as inflation rises. As a result, as inflation rises, bond prices tend to fall.
The fact that most bonds pay fixed interest, or coupon payments, is one explanation. Inflation reduces the present value of a bond’s future fixed cash payments by eroding the buying power of its future (fixed) coupon income. Accelerating inflation is considerably more damaging to longer-term bonds, due to the cumulative effect of decreasing buying power for future cash flows.
Riskier high yield bonds often produce greater earnings, and hence have a larger buffer than their investment grade equivalents when inflation rises, says Haworth.
Stocks have outperformed inflation over the previous 30 years, according to a study conducted by the US Bank Asset Management Group.
2 Revenues and earnings should, in theory, increase at the same rate as inflation. This means your stock’s price should rise in lockstep with consumer and producer goods prices.
In the past 30 years, when inflation has accelerated, U.S. stocks have tended to climb in price, though the association has not been very strong.
Larger corporations have a stronger association with inflation than mid-sized corporations, while mid-sized corporations have a stronger relationship with inflation than smaller corporations. When inflation rose, foreign stocks in developed nations tended to fall in value, while developing market stocks had an even larger negative link.
In somewhat rising inflation conditions, larger U.S. corporate equities may bring some benefit, says Haworth. However, in more robust inflation settings, they are not the most successful investment tool.
According to a study conducted by the US Bank Asset Management Group, real assets such as commodities and real estate have a positive link with inflation.
Commodities have shown to be a dependable approach to hedge against rising inflation in the past. Inflation is calculated by following the prices of goods and services that frequently contain commodities, as well as products that are closely tied to commodities. Oil and other energy-related commodities have a particularly strong link to inflation (see above). When inflation accelerates, industrial and precious metals prices tend to rise as well.
Commodities, on the other hand, have significant disadvantages, argues Haworth. They are more volatile than other asset types, provide no income, and have historically underperformed stocks and bonds over longer periods of time.
As it comes to real estate, when the price of products and services rises, property owners can typically increase rent payments, which can lead to increased profits and investor payouts.
How do people become wealthy as a result of hyperinflation?
I sold all of my Bitcoin a little over a month ago. What I believed was going to be my worst financial blunder ever turned into a 47 percent after-tax profit after a year. I’m not boasting; I’m simply fortunate. I made a tiny investment in Bitcoin to protect myself against the prospect of a U.S. currency hyperinflation.
After all, central banks have produced much too much fiat currency, and individuals who own Bitcoin will become wealthy when the market collapses…right?
There is one minor flaw in this logic: history does not appear to back it up.
It’s not that Bitcoin won’t gain in value if the US dollar collapses; it’s just that a rise in price doesn’t necessarily mean a rise in worth.
What is the significance of this distinction?
Because even if Bitcoin reaches $1 million per coin (price), it does not imply that it will be able to purchase $1 million worth of goods or services today (value).
In the end, purchasing power, not price, is what matters to you and every other investor.
And, as you can see from the history of hyperinflations around the world, investment in other currencies does not always result in increased purchasing power.
So, what exactly does that mean?
Taking out debt (in the currency before it hyperinflates) or owning stocks/businesses are the best ways to enhance purchasing power during a severe hyperinflation.
What makes this so?
Because debt payments tend to zero in real terms (as the currency loses value) during hyperinflations, whereas stock holdings tend to increase in price to keep up with inflation.
This was true during Zimbabwe’s recent hyperinflation, when stocks served as a safe haven, and also during the fall of the mark in early twentieth-century Germany.
In his book The Downfall of Money: Germany’s Hyperinflation and the Destruction of the Middle Class, Frederick Taylor wrote:
So, who benefited from Germany’s inflation?
Creditors were left with almost nothing.
Inflation, on the other hand, effectively eliminated the debts of everyone who owed money…
Unlike fixed assets, stocks and shares gained in value in tandem with inflation over time, providing a high return in many situations.
Before it vanished, the stock exchange had been a popular means of accumulating money…
Nonetheless, as long as businesses continued to sell and develop, as they did for the most part between 1919 and 1922, the market quickly adjusted the value of investors’ shares to reflect inflationary swings.
Looking at the value of the German stock market in both marks and dollars over this inflationary period (thanks to Joe Weisenthal for the graph) demonstrates this clearly:
During Germany’s hyperinflation, equities were incredibly adept at retaining and increasing their purchasing value.
And if you buy stocks with debt, the returns might be much better, as some astute German investors discovered (from Adam Fergusson’s When Money Dies):
Borrowing paper marks, transforming them into goods and factories, and then repaying the lenders with depreciated paper has been the method of inflation profiteering.
If you honestly feel the US currency is about to collapse, you should borrow as much money as you can (in dollars) and buy as many income-producing assets as you can (stocks/businesses, real estate, etc.).
Naturally, the future may not be the same as the past.
Perhaps this hyperinflation will be unique.
Perhaps an alternative currency, such as Bitcoin or gold, will be a better long-term investment than stocks.
The evidence is still inconclusive.
Gold hasn’t been a fantastic inflation hedge during the previous 40 years, as Michael Batnick recently shown (note: gold’s yearly return is on the x-axis, with annual inflation on the y-axis):
Of course, gold may behave differently during a hyperinflation, but given how uncommon hyperinflations are, we may not have enough evidence to make a conclusive statement.
What impact does inflation have on the stock market?
Consumers, stocks, and the economy may all suffer as a result of rising inflation. When inflation is high, value stocks perform better, and when inflation is low, growth stocks perform better. When inflation is high, stocks become more volatile.
Is inflation beneficial to debtors?
Inflation, by definition, causes the value of a currency to depreciate over time. In other words, cash today is more valuable than cash afterwards. As a result of inflation, debtors can repay lenders with money that is worth less than it was when they borrowed it.
What is creating 2021 inflation?
As fractured supply chains combined with increased consumer demand for secondhand vehicles and construction materials, 2021 saw the fastest annual price rise since the early 1980s.
What impact does inflation have on a family?
Furthermore, we estimate that lower-income households spend a larger portion of their budget on inflation-affected products and services. Households with lower incomes will have to spend around 7% more, while those with better incomes would have to spend about 6% more.