Down Debt

Why inflation can be good for ordinary Americans and bad for the rich

CNN

By Allison Morrow, CNN Business

No one likes to pay more for stuff. That’s why inflation, especially the steep price hikes we’ve seen in recent months, sounds like a bad word.

But overall, inflation can actually be a good thing for many working-class Americans, especially those with fixed rate debt like a 30-year mortgage. This is because wages go up, which not only empowers workers, but also gives them more money to pay off their debts. In addition, in the case of a mortgage loan, your monthly payment will be the same but your house will increase in value.

And many of the people who take a bath when prices rise are high net worth individuals who own the vast majority of government bonds.

The problem is, you aren’t going to feel the rise immediately.

“There’s light at the end of the tunnel, it’s just that it might take a few years,” said Kent Smetters, professor of business economics at the Wharton School of Business.

How inflation favors debtors

The immediate benefits of inflation for ordinary people are less tangible than the drawbacks – you feel the sting of your grocery bill and the punch of filling your gas tank. Less palpable but still significant is the ever lower weight of your debt.

“If you borrow at a fixed rate, like a 30-year mortgage, you earn as inflation rises,” says Smetters. “We often think of a 30-year mortgage as a hedge against inflation.”

In other words, the cost of your mortgage remains stable, while the amount of money you have to pay for it increases. It’s not a perfectly timed event, of course: Wages don’t immediately rise with inflation, but they end up doing it, Smetters said.

Mortgages, the vast majority of which are 30-year fixed rate loans, account for nearly $ 11 trillion of the current record debt of US $ 15 trillion. Meanwhile, wages rise with prices, essentially reducing the real value of that debt. The same inflation benefit applies to anyone repaying federal student loans, which also have a fixed interest rate. As your income increases, you basically get a reduction on what you owe back.

Wage growth has so far generally not kept up with price increases, but analysts believe that could change in the new year as shipping bottlenecks begin to ease. .

Household incomes have been supported by government transfers such as stimulus payments and unemployment benefits. In the first eight months of this year, personal income – which includes salaries earned and government payments – was 15% higher than it was in 2019, said Daniel Alpert, managing partner of Westwood Capital.

“This represents hundreds of billions of dollars… and was already adding to a very high accumulated savings by households, which resulted from the fact that they had nothing to spend it on because everyone in 2020 was locked up. “

Losers of inflation

Of course, not all debt goes down with inflation. Credit card interest rates, which are largely not fixed, have risen this year to an average of 17.13%, just below the all-time high of 17.14% reached in 2019, according to the Federal Reserve. And anyone living on a fixed income, like retirees, who doesn’t benefit from the pay increases that working people see, feel additional pain as prices rise.

Another affected group are those exposed to government bonds – think of households with over $ 1 million who typically invest in both stocks and debt.

“Who are the people who are going to suffer by holding a lot of 10-year or even 30-year bonds?” This tends to be higher income households, says Smetters. “So they’re going to lose with higher inflation. “

This is because those bondholders, who basically lend money to the government, will be paid back in money that has less purchasing power.

“We just don’t know which end is in place”

However, inflation has a sticky psychological side that makes it difficult to clearly define who wins and who loses. Because even though wages are rising and job growth is strong, Americans are disappointed with the state of the economy.

The consumer confidence index fell to a decade-long low in early November, according to data collected by the University of Michigan.

“The November fallout is named after inflation,” Wells Fargo economists said in a recent memo.

One in four respondents said inflation had made their standard of living worse. And half said they expected inflation to wipe out the wage gains they had been awarded over the past year.

“I feel like people are exhausted from the level of chaos we have, and inflation is a symptom,” said Wendy Edelberg, senior economics researcher at the Brookings Institution. “So we have the booming economy, but how long is it going to grow and for whom is it going?” And is it increasing in a healthy way? Is it increasing in an unhealthy way? “

Edelberg concluded: “Inflation just looks like really hard evidence that we just don’t know what end is in place. “

– Anneken Tappe of CNN Business contributed to this article.

The-CNN-Wire
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