Who Are the Biggest Losers From Inflation?

Inflation refers to a broad rise in the prices of goods and services across an economy over time. This increase leads to a fall in the purchasing value of money, meaning each unit of currency buys fewer goods and services. While inflation impacts the economy broadly, certain individuals and groups experience a significant loss of financial well-being due to this erosion of purchasing power.

Individuals with Fixed Incomes and Fixed-Value Investments

Individuals who rely on fixed income streams or hold fixed-value investments often experience a significant decline in their real wealth during periods of inflation. Their income or investment returns do not adjust to rising prices, meaning the purchasing power of their money diminishes over time. This makes it harder to afford necessary goods and services.

Traditional pensions offer a set monthly payment that does not increase with the cost of living, so their real value decreases as inflation rises. Fixed annuities also provide a predetermined income stream whose value erodes when inflation outpaces the payout rate. Some government benefits, while often indexed to inflation, may not always fully keep pace, leaving beneficiaries with reduced real purchasing power.

Savings held in cash or low-interest savings accounts are particularly vulnerable to inflation. If the interest rate is lower than inflation, the real return on savings is negative, meaning the money loses value over time. This makes cash and traditional savings accounts unsuitable for long-term wealth preservation during inflationary periods.

Fixed-rate investments like bonds also suffer from inflation. Bonds provide fixed interest payments, and if inflation increases, their real return is reduced. If inflation exceeds the nominal interest rate, the bondholder’s return does not keep pace with the rising cost of living. The future cash flows from bonds buy less as the purchasing power of money declines. This risk is especially pronounced for longer-maturity bonds, as the erosion of purchasing power extends over a greater period.

Retirees and individuals on disability are particularly vulnerable because they often depend heavily on fixed income sources and accumulated savings. Their ability to earn more income to offset inflation is limited, making them disproportionately affected by rising prices.

Wage Earners and Consumers

Inflation directly impacts the daily lives of wage earners and consumers by eroding the purchasing power of their earnings. When prices rise faster than wages, workers’ “real wages” decline. This means that even if nominal income increases, the ability to buy the same amount of goods and services decreases.

Rising costs of essential goods and services consume a larger portion of household budgets, making it challenging for families to maintain their standard of living. These increases disproportionately affect lower-income households, who spend a greater percentage of their income on necessities like food, housing, transportation, and healthcare. For these households, price increases on essentials leave less disposable income for other needs or savings.

Housing costs, including rent and mortgage payments, are significant contributors to consumer budgets during inflationary periods. High inflation often leads central banks to raise interest rates, which increases mortgage rates, making homeownership more expensive for new buyers or those with variable-rate loans. Many households are considered cost-burdened, spending over 30% of their income on housing.

When wages do not keep pace with inflation, consumers may cut back on discretionary spending or struggle to afford basic necessities. This can lead to a decrease in overall consumption and a reduction in the quality of life for many families.

Creditors and Those Owed Money

Inflation negatively impacts individuals and entities that have lent money at fixed interest rates, commonly referred to as creditors. The real value of the money they are repaid in the future is less than the real value of the money they originally lent. While the nominal repayment amount remains the same, its purchasing power diminishes due to rising prices.

A bank that issues a fixed-rate mortgage will receive the same monthly payment amount over the loan’s term. However, if inflation rises after the loan is issued, the purchasing power of those fixed payments decreases for the bank. This means the money repaid can buy fewer goods and services than the money initially lent. Individual lenders or investors holding fixed-rate bonds face a similar erosion of value.

Fixed-rate bondholders receive predetermined interest payments and a principal repayment at maturity. If inflation increases, the real value of these fixed payments and the final principal amount diminishes. This reduces the bond’s real return, making it less attractive during inflationary periods.

This dynamic creates a situation where borrowers with fixed-rate loans may benefit from inflation, as they pay back their debt with money worth less than when borrowed. Conversely, lenders who extended those fixed-rate loans bear the loss of purchasing power on the money they receive. This illustrates how inflation can redistribute wealth from creditors to debtors when interest rates do not adequately compensate for the loss of purchasing power.