Inflation: Who Does It Favor the Most?

The world’s inflation is at an all-time high these days. In fact, with the aftermath of the COVID-19 pandemic followed by the latest Russia-Ukraine war, it skyrocketed to a 40-year high in June 2022.

While it means a higher cost of living for most consumers, inflation can benefit several individuals, investors, and sectors. In this article, we’ll round up all of inflation’s biggest winners and how they can benefit from it.

Borrowers With Existing Fixed-Interest Loans

Many borrowers today and in the future won’t benefit from inflation. Inflation prompts the Federal Reserve to increase interest rates, which in turn, results in larger payments. This way is called the “hawkish monetary policy.” While it discourages borrowing, it’s often done to curb inflation.

However, if you took out loans with low interest and fixed rates before inflation rose, you may be shielded from its deleterious effects. During high inflation, these fixed-interest rate loans will cost you less than when you took them out since dollars have lost some of their value. In other words, you’re paying the lender with money that’s worth less than what it was when you borrowed it.

Let’s say you invested in a real estate property worth half a million in June 2021. It has a 10% down payment and must be paid with a 30-year fixed-rate mortgage at a 2.75% interest rate, which will be a monthly of $2,232. At a 5.30% interest rate, the same mortgage would mean a monthly payment of $2,893, approximately over $650.

Another benefit of high inflation is that wages and revenues will also rise. That means if your monthly payments for your debt will stay the same, yet you’re earning more money, they’ll only take up a smaller portion of your working capital.

Fixed-interest loans include personal loans, federal student loans, auto loans, and fixed-rate mortgages. Some online loans have fixed interest rates too. However, opt for reputable lenders like CreditNinja.com to avoid paying too much. Overall, online platforms are great for those who need a short-term source of credit. They also promise fast loans, even for borrowers with bad credit.

Banks and Lenders

As mentioned, banks charge higher percentages for lending money to fight inflation. This increase in interest rates for credit allows banks and other financial companies to collect more interest and, in turn, earn more profits.

Apart from the interest rate hike, the increasing consumer prices are also a driving factor. When they continue to skyrocket, consumers end up exhausting cash on hand and savings. Consequently, they’ll likely rely on credit to make ends meet.

An increase in credit translates to higher credit card balances, more loan applications, and higher demand for other credit products and home equity lines of credit. All of these increase banks’ and lenders’ profits.

Lenders may also get more profits from borrowers when the latter takes time to make repayments. Considering the increasing consumer prices, many borrowers may prioritize their necessities over their loans. It usually makes them pay only the minimum amount every month, which makes repaying the debt take longer. As a rule of thumb, the longer the loan term, the higher the interest they’ll pay.

Many saving accounts, in contrast, haven’t increased their interest rates. Traditional banks aren’t motivated to pay higher rates since they don’t necessarily need to attract new deposits. However, according to Bankrate, if the federal funds rate is likely to rise to around 5.25% this year, 2023, savings rates could increase too, with high-yield savings accounts likely to peak at 5.25% APY (annual percentage yield).

Collectors

As the dollar loses purchasing power amid inflationary periods, investors will alternatively turn to hard assets, particularly collectibles. These may include wines, artworks and paintings, precious metals (like gold, silver, or platinum), books, coins, stamps, and even baseball cards.

Collectibles’ values tend to remain the same despite market volatility since they’re not directly correlated to traditional markets. In other words, compared to other assets, they’re much safer and more stable investments, especially during significant value fluctuations.

For example, according to Forbes, just with fine arts, they consistently deliver annual average returns of 7.6%, despite the bear market. Wines, on the other hand, have average returns of 8% to 12% per year.

The only problem with collecting is that it has a high barrier to entry. Most collectors have to spend time learning about their collection, and some may even seek advice from industry experts and professional advisors. It will, of course, require money, not to mention the costs of building your collection of breadth and depth.

Energy Companies

The demand for energy and gas rarely drops. Despite increases in prices, consumers still have to use energy for day-to-day living, and producers still have to power their operations.

The thing is, it’s not only the recent inflation that caused energy prices to skyrocket over the past year. Labor shortages, supply chain issues, the recent war in Ukraine, and the COVID-19 pandemic contributed to high energy prices, benefiting several companies.

In addition to those perfect storm of factors, many energy companies didn’t lose oil amid the COVID-19 outbreak since almost everyone stayed home. In other words, they have a lot of supplies. What’s more, the cost of pumping oil is still the same, but they’re now receiving $100 per barrel due to inflation.

However, only energy companies are enjoying a steep increase in profits. Due to inflation, governments in almost every country are supervising power and gas prices, and consumers can now easily transfer from one supplier to another. This regulation and competition keep energy costs low. As a result, several energy suppliers suffered or, worse, went bankrupt.

Food Manufacturers

Inflation has been generally kind to the food industry. Like energy and gas, every consumer will eventually buy foods and drinks to stay alive. However, not every part of the food sector is resistant to inflationary periods.

Take restaurants, for example. Many of them have been recently crushed by the peak of the COVID-19 pandemic.

Now that the pandemic has eased up, many consumers are still avoiding restaurants since inflation pressures their budgets. It caused several restaurant owners to still struggle financially nowadays.

In contrast, large global food companies have made huge profits amid the recent inflation. For example, Coca-Cola Company’s turnover increased to 12% last quarter. One reason for this is that despite increased prices, consumers seek after their products and are willing to pay a little more money for them.

Commodity Investors

Also known as “primary products” or “primary goods,” they’re goods or services sold for consumption or production as they’re found in nature.

Commodities are often categorized into two: soft and hard commodities.

1. Soft commodities - include livestock (like pork) and agricultural products (like coffee, corn, soybeans, sugar, or wheat)

2. Hard commodities - include natural resources that must be extracted or mined (like rubber, oil, or gold)

When inflation accelerates, the prices of commodities and the products produced using them increase. Since they directly influence the future prices of processed goods, high commodity costs are often considered indicators of inflation.

Overall, commodities perform well when the costs for consumer goods are on the rise. When this happens, commodity investors can easily earn a lot from selling their stocks. That’s why investing in them is a surefire way to provide portfolios with a hedge against inflation.

Landowners and Real Estate Investors

Not only the costs of commodities but also the costs of construction-related products and services will rise in inflationary times. Due to these, fewer new builds and other development plans can get off the ground. In turn, there’ll be a drop in property inventory levels and a rise in demand ratios, increasing prices.

Rental property owners can also take advantage of inflationary periods. As home prices increase due to inflation, property mortgage debt’s loan-to-value lowers. That means their mortgage payments will be the same while their rental property equity goes up.

By increasing costs, landlords can also benefit from short-term lease agreements. For example, they’ll get even higher real income when they charge more for their rental properties due to inflation yet keep their mortgage payment the same.

More importantly, real estate can hedge against inflation. Their values historically increase over time. Moreover, as mentioned, the rent increase enables them to earn more profits and pay for the same mortgage payment. It helped them to get protected against inflation, unlike those paying higher housing costs.

Final Thoughts

Savvy investors have several options to choose from as inflation hedges. However, for those who are still unsure and hesitant to invest, take this inflation surge period as a good chance to assess your overall investment performance and ensure that your allocation aligns with your goals.

Avoid making dramatic changes as well. Sure, there’s high inflation, but as long as you’re cutting costs where possible, steering clear away from highly inflated items, and investing wisely, you’re a step ahead of many others.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.