Who Benefits the Most From Inflation?

Inflation refers to a sustained increase in the general price level of goods and services within an economy, reducing purchasing power over time. While inflation is often perceived negatively due to its erosion of buying power, certain individuals, entities, and types of assets can experience notable benefits. This article explores who stands to gain when prices rise across the economy.

Individuals and Entities with Debt

Inflation can provide a significant advantage to individuals and entities holding fixed-rate debt. The nominal payment on this debt remains constant, but its real value diminishes over time. As prices and incomes rise due to inflation, fixed debt payments become a smaller portion of one’s financial capacity, making repayment easier.

Consider a homeowner with a fixed-rate mortgage or a student with a fixed-rate student loan. Their monthly payment does not change even as the cost of living increases. If wages or business revenues grow with inflation, the relative burden of fixed debt payments decreases, making the debt cheaper in real terms. This dynamic transfers wealth from lenders, who receive payments with reduced purchasing power, to borrowers repaying with “cheaper” dollars. This benefit is pronounced for long-term fixed-rate obligations, where the compounding effect of inflation on future repayments is greater.

Holders of Real Assets

Tangible assets, known as real assets, maintain or increase their nominal value during inflationary periods, preserving or growing owner wealth. These assets include real estate, commodities like gold, oil, and agricultural products, and certain equities representing companies with substantial physical holdings. Unlike cash or traditional fixed-income investments whose real value can erode, real assets serve as a hedge against rising prices.

The prices of these assets rise in conjunction with or sometimes faster than the general price level. Real estate values appreciate as labor, land, and material costs increase, and commercial leases may include rent escalators tied to inflation. Commodity prices respond directly to economic forces that drive broader inflation, such as supply constraints or changes in demand. This appreciation helps owners maintain their real purchasing power, as nominal gains can offset currency value erosion.

Government as a Debtor

Governments with substantial national debt can experience benefits from inflation. A primary mechanism is the erosion of the real value of outstanding government debt. When inflation is higher than anticipated, the real burden of fixed-rate government bonds decreases, transferring wealth from bondholders to the government. This makes it easier for the government to manage and repay its financial obligations.

Inflation also leads to an increase in nominal tax revenues for the government. As wages and prices rise across the economy, nominal tax bases for various taxes, such as sales tax and income tax, expand. Higher consumer prices directly boost sales tax receipts, and increased nominal incomes can push taxpayers into higher income tax brackets, a concept known as “fiscal drag,” even without changes to tax rates. This provides governments with more nominal funds, which can reduce budget deficits and lower public debt-to-GDP ratios.

Companies with Market Power

Businesses possessing “pricing power” or “market power” are well-positioned to thrive during inflationary periods. Pricing power refers to a company’s ability to raise prices without significant loss in sales volume or market share. This capability is advantageous when input costs like raw materials and labor are rising, allowing companies to pass on increased expenses to consumers. In some cases, companies with strong pricing power can expand their profit margins during inflationary times.

Companies gain pricing power through characteristics such as strong brand recognition, offering essential goods or services, limited competition, or high barriers to entry in their industry. Firms in sectors like consumer staples, healthcare, or specialized technology may have this ability. Their differentiated products or services mean customers are less sensitive to price changes, enabling profitability despite rising operational costs.