Who Is Most Likely to Benefit From Inflation?

Inflation refers to a general increase in the prices of goods and services over a period, alongside a corresponding fall in the purchasing value of money. While inflation often presents challenges for many, certain individuals, businesses, and entities can experience financial advantages during such times.

Individuals with Debt

Individuals holding significant debt, particularly those with fixed-rate loans, often find themselves in a more favorable position during periods of inflation. As the purchasing power of money declines, the fixed payments on their loans become easier to manage with future earnings that are likely to increase in nominal terms. Homeowners with fixed-rate mortgages benefit as their monthly principal and interest payments remain constant, while their income may rise with inflation. Individuals with fixed-rate student loans or car loans experience a similar advantage; the amount owed does not increase, but the money they use to repay it is worth less than when they borrowed it.

Holders of Real Assets

Owners of tangible, or “real,” assets frequently see the value of their holdings increase during inflationary periods. As the cost of producing new goods and services rises, the value of existing physical assets tends to appreciate commensurately, or even outpace inflation. Real estate, encompassing residential homes, commercial properties, and raw land, is a prime example of an asset that often performs well. Property values and rental income tend to climb with inflation, making real estate a potential hedge against rising prices. Commodities, such as gold, oil, and various raw materials, also tend to benefit as their prices are directly linked to the costs of production and demand in an inflationary environment.

Certain Businesses

Specific types of businesses are well-positioned to thrive during inflationary periods due to their operational characteristics and market power. These are companies that possess “pricing power,” meaning they can raise the prices of their products or services to offset increased operational costs without experiencing a significant drop in customer demand or market share. Businesses providing essential goods or services, such as utilities or consumer staples, often fall into this category because consumers continue to purchase their offerings regardless of price increases.

Companies holding substantial inventory purchased at lower costs can also benefit as inflation drives up the replacement cost of those goods. They can sell their existing stock at higher, inflation-adjusted prices, thereby increasing their profit margins. Industries with strong brand loyalty or those operating in consolidated markets, like certain beverage or semiconductor companies, may also exhibit strong pricing power, allowing them to pass on rising expenses to consumers more effectively.

Government Entities

Government entities, particularly at the federal level, can experience several financial benefits from inflation. As significant debtors, governments often see the real value of their outstanding national debt diminish over time. This occurs because the fixed nominal value of their debt obligations becomes less burdensome to repay with money that has a lower purchasing power.

Inflation can also lead to an increase in nominal tax revenues for governments. As prices and wages rise, higher nominal incomes can push individuals into higher income tax brackets, a phenomenon sometimes referred to as “bracket creep” or “fiscal drag.” This automatically increases the amount of income tax collected without requiring changes to tax rates. Similarly, higher prices for goods and services result in increased sales tax collections, as these taxes are typically levied as a percentage of the transaction value.