Rising Interest Rates Create More Losers Than Winners

Inflation Winners And Losers | Bankrate.com

Rising Interest Rates Create More Losers Than Winners

After a year of worrying about inflation, investors have finally begun to collect themselves again.

Optimistic projections about economic growth in 2018 quickly turned into worries about inflation and rising interest rates. So after a strong start to the stock market, the market spent the rest of the year fretting that inflation might be rising too quickly and the Federal Reserve – under new Chair Jerome Powell — would hike interest rates faster than warranted.

Their fear? Too-high interest rates would slam the brakes on one of the longest periods of American economic expansion.

But for now, so-called core inflation, which calculates inflation without volatile energy and food prices, has remained capped. Core inflation peaked at 2.3 percent in July 2018 and has moderated since then, due in part to the Fed raising rates to dampen economic activity.

However, the market became spooked that the central bank might be acting too quickly. In September the Fed bumped rates for the third time that year, and stocks tumbled hard the following month and mostly slid into the new year. Then the Fed raised rates again in December.

However, the Fed took notice of the market’s reaction and moderating inflation, and has backed off its more aggressive stance. The central bank projects just two rate hikes in 2019.

Now markets are somewhat concerned that growth might not be robust enough, and inflation is not the specter it was a year ago. The $1.5 trillion Trump tax cut offered a one-time boost that won’t return in 2019, while trade battles with China and lackluster global growth are taking the edge off inflation. Still, wage growth has been picking up, putting upward pressure on prices.

Whether inflation becomes especially troublesome remains to be seen, but it’s always worth watching. For the average American, the mere term “inflation” causes flash panics. It conjures worries of a stagnating economy, rising prices, and an income that just can’t keep up with the cost of living.

But every economic event has winners and losers. Saving account yields may have been hurt by the Fed lowering rates after the recession, but fewer workers were laid off and investors enjoyed rising asset prices. The same is true of higher prices.

Inflation’s big winners

Fixed-rate mortgage holders: Anyone with large, fixed-rate debts mortgages benefit from higher inflation, says Mark Thoma, professor of economics at the University of Oregon in Eugene.

“They’re going to be paying back with devalued dollars,” Thoma says.

A higher inflation rate also helps homeowners who bought during the peak of the real estate boom and now owe more than their home is worth by building equity quicker.

Investors in stocks: Stockholders get some protection from inflation because the same factors that raise the price of goods also raise the values of companies.

“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.

Investors in commodities: 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.

Inflation’s many losers

The American economy: Dramatically high inflation historically has hurt the American economy, McBride says.

“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.”

In periods of high inflation, your standard of living declines hand in hand with your relative purchasing power. Also, borrowing to fund new businesses, buy homes and finance other tasks necessary for a healthy economy becomes more difficult as lenders jack up interest rates to hedge against further inflation.

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.

“Keep your maturities short, so you have the ability reinvest at higher rates as inflation works its way out,” McBride says. “You don’t want to be locked in long term at a low rate of return only to see inflation go racing past you.”

Retirees: A high inflation rate often means wage increases, but that won’t benefit those who are retired, McBride says—their pot of retirement money already is fixed.

“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, retirees.”

Investors in long-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.”

McBride says bond investors can hedge against inflation by favoring shorter-term bonds and inflation-indexed bonds.

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

Credit card debt holders: Most credit cards have a variable interest rate tied to a major index such as the prime rate. Because of this, credit card holders experience quickly climbing rates and higher payments in an inflationary environment.

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, high interest rates for mortgages and a relentless slide in the value of any money they’ve put away for a down payment.

Learn more:

Источник: https://www.bankrate.com/investing/winners-and-losers-if-inflation-skyrockets/

Who are the winners and losers from inflation?

Rising Interest Rates Create More Losers Than Winners

Inflation is a continuous rise in the price level. Inflation means the value of money will fall and purchase relatively fewer goods than previously.

In summary:

  • Inflation will hurt those who keep cash savings and workers with fixed wages.
  • Inflation will benefit those with large debts who, with rising prices, find it easier to pay back their debts

Losers from inflation

Savers. Traditionally savers lose from inflation. If prices rise, the value of money falls, and the real value of savings decline. For example, in periods of hyperinflation, people who had saved all their life could see the value of their savings wiped out because, with higher prices, their savings are effectively worthless.

Inflation and Savings

This shows the purchasing power of a US Dollar. During periods of higher inflation (1945-46 and mid-1970s) the value of a dollar falls. Between  1940 and 1982, the value of one dollar fell from 700 to 100 or 85%.

  • Savers can be protected from inflation if they can gain an interest rate higher than the rate of inflation. For example, if inflation is 5%, but banks are giving an interest rate of 7%, then those who save in a bank will still see a real rise in the value of their savings.

From 2010 the inflation rate has generally been higher than base interest rates set by the Bank of England.

Savers are much more ly to lose out if we get both high inflation and low-interest rates. For example, in the aftermath of the 2008 credit crisis, inflation rose to 5% (due to cost-push factors) but, interest rates were cut to 0.5%. Therefore, savers lost out during this period.

Workers on fixed-wage contracts

Another potential loser from inflation are workers who are stuck on fixed-wage contracts. Suppose that workers have a wage freeze and then inflation is 5%. It means at the end of the year, their wages purchase 5% less than at the start of the year.

In the period 2008-14, CPI inflation was above nominal wage rises – causing a decline in real wages.

Even though inflation was relatively low (by UK historical standards) – it left many workers with a fall in real wages.

  • Inflation may particularly harm workers in non-unionised jobs, where workers have less bargaining power to demand higher nominal wages to keep up with rising inflation.
  • This period of negative real wages will particularly harm those who are living close to the poverty line. Those on higher incomes will be able to absorb a fall in real wages. Even a modest increase in prices can make it more difficult to purchases goods and services. The UK saw a rise in the use of food banks in the period 2009-17.
  • In the 1970s, the UK had inflation of over 20%, but wages rose to keep pace with rising inflation, therefore workers continued to have real wage increases. In fact, rising wages was a cause of inflation in the 1970s.

Borrowers on variable mortgage rates

A rise in inflation can cause the government/central bank to increase interest rates. This will lead to a higher borrowing rate. Therefore mortgage owners who have variable mortgage rates can see significant rises in their mortgage payments.

In the late 1980s, the UK experienced an economic boom, economic growth was high, but inflation increased close to 10% – as a result of the overheating economy, the government increased interest rates. This saw a rapid rise in mortgage costs – which were largely unexpected. Many homeowners found they couldn’t afford higher mortgage payments and so defaulted on mortgage payments.

The high inflation of the 1980s indirectly caused mortgage payments to rise and many to lose their home.

  • However, higher inflation doesn’t necessarily lead to higher interest rates. Post-2008 recession, there was cost-push inflation, but the Bank of England didn’t raise rates (they felt inflation would be temporary). Therefore, mortgage owners saw a fall in their variable rates and mortgage payments as a percentage of income fell.

General economic confidence

If inflation is high and variable, it creates uncertainty for both consumers, banks and companies. There is a reluctance to invest and this can lead to lower economic growth and less job availability. Therefore, in the long-term, higher inflation is associated with a deterioration in economic prospects.


If UK inflation is higher than our competitors, then UK goods will become less competitive and exporters will see a decline in demand and struggle to sell their goods.

Winners from inflation

Business/household with high debt

High rates of inflation can make it easier to pay back outstanding debt. Business will be able to increase prices to consumers and use the extra revenue to pay outstanding debts.

  • However, if a bank borrowed at a variable mortgage rate from a bank. Then if inflation rises and the bank increase interest rates, this will increase the cost of debt repayments.

Governments with debt

Inflation can make it easier for the government to reduce the real value of its debt (public debt as a % of GDP)

This is especially true if inflation is higher than expected. For example in the 1960s, markets expected low inflation so the government were able to sell government bonds at low rates of interest rates.

However, in the 1970s, inflation was higher than expected – and higher than the bond yield on a government bond.

Therefore owners of the bonds saw a fall in the real value of their bond, whilst the government saw a fall in the real value of its debt.

In the 1970s, unexpected inflation (from oil price shock) helped to reduce governments debt burden in various countries such as the US.

Between 1945 and 1991, the nominal value of government debt rose, but inflation and economic growth helped the value of national debt to fall as a percentage of GDP.

Landowners/Owners of physical assets

In a period of hyperinflation, those with savings can see a rapid fall in the real value of their savings. However, those who own physical assets tend to be protected. Physical wealth – such as land, factories and machines will retain their value.

In periods, of hyperinflation, there is often increased demand for assets, such as gold and silver. Gold cannot be subject to the same inflationary pressures as paper money as it cannot be printed.

However, it is worth bearing in mind, that in a period of inflation, buying gold is not guaranteed to increase in real value. This is because the price of gold can also be subject to speculative pressures. For example, the price of gold spiked in 1980 and then fell afterwards.

However, in periods of hyperinflation, holding gold is a way to protect real wealth in a way money is not.

Banks and mortgage companies

In periods of negative real interest rates, it tends to increase profit margins for banks With base rates close to zero and very low saving rates, lending rates are higher than saving rates.

Anecdotal evidence

the values in Table IV (page 441) of The ‘Economics of Inflation’ by Costantino Bresciani-Turroni, published 1937.

A good example of extreme inflation is Germany in the period 1922-24, the inflation rate reached astronomical figures.

Middle-class workers who had put a lifetime of savings into their pension fund found that in 1924, the pension fund was worthless. After working for 40 years, one middle-class clerk cashed his retirement fund and used it to buy a cup of coffee.

In this hyperinflation, it led to great fear, uncertainty and confusion. People responded by trying to buy anything physical – buttons, cloth – anything that might hold value better than money.

However, not everyone suffered as much. Farmers did well because the price of food continued to rise. Business who had borrowed large sums found that their debts had effectively disappeared due to inflation reducing the real value of debt. These businesses could buy up over firms who had gone business due to the costs of inflation.

Those who owned land or physical assets were able to maintain their wealth.

This kind of very high inflation creates significant grievance as inflation can appear an unfair way to redistribute wealth from savers to borrowers.


  • Causes of inflation
  • Costs of inflation

Источник: https://www.economicshelp.org/blog/145181/inflation/who-are-the-winners-and-losers-from-inflation/

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