The word "inflation" strikes fear into the hearts of many Americans. It conjures worries of a stagnating economy, rising prices, a falling dollar and an income that just can't keep up with the cost of living. But while a high inflation rate hurts many Americans financially, others actually see a benefit. Following are some potential winners and losers in an inflationary cycle:
Winners
Fixed-rate mortgage holders. Anyone with large, fixed-rate debts such as mortgages benefit from higher inflation, says Mark Thoma, professor of economics at the University of Oregon in Eugene.
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"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 are now "under water" by bringing equity back into the positive column more quickly.
Auto-loan holders. Auto-loan holders who bought before inflation and locked in a relatively low interest rate benefit from high inflation because they pay off a sizable debt with devalued dollars, says Nancy Lowenberg, a financial adviser with Hiawatha, Iowa-based Securian Advisors MidAmerica.
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."
Small-business owners with big fixed-rate debts. As prices for products go up, small-business owners find themselves better able to manage fixed-rate debt from investments in equipment and other business necessities, Lowenberg says.
"Think about a business that's expanding and borrows money to put in state-of-the-art equipment so that it can grow," Lowenberg says. "If inflation is higher than normal, and they're getting paid more for their product because raw material prices were up and they're paying their workers more, they're paying the debt back in stable dollars."
Investors in commodities. Bankrate senior financial analyst Greg McBride says commodity prices track the inflation rate closely. Buying storable commodities such as gold can be a good hedge against inflation.
Losers
The American economy. 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."
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In periods of high inflation, consumers' purchasing power falls and their standard of living slides with it.
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.
Friday, March 19, 2010
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