Long Term Consequences of Inflation

Janet Noble | Published November 3, 2019

Federal Reserve Keeps an Eye on Inflation

Once again, the Federal Reserve is expressing serious concerns about inflation. Why are they concerned about inflation, and what does that even mean?

Inflation is sometimes defined as an increase in the money supply, and sometimes defined as a measurement of upward pressure on prices and wages. Inflation will affect different families in different ways.

If you have long term financing, but own the underlying asset, then inflation can be good for you. The classic example is renting versus owning your home. If you rent your home, inflation will cause rents to rise regularly. If you own your home, your payments will remain the same while your home increases in value. While inflation will cause upward pressure on your earnings, your bills stay the same and become easier to pay.

Who loses with high inflation?

Retirees on fixed incomes lose. Prices rise, but their incomes stay the same. Other losers include exporters whose products become less competitive globally. People who rent their homes lose, as rents outpace wages.

Who Wins with high inflation?

Homeowners win with high inflation, as long as your interest rates are at a fixed rate. Your earnings will rise with inflation, but your housing costs remain the same. Similarly, people with solar panels win. This is because utility/electric prices rise with inflation, while solar panel payments do not.

Biggest Takeaway: When you're faced with a decision to own or rent something, you're best bet is to be an owner, with fixed interest rates. It's the simplest hedge against inflation for most people.

​Long Term Consequences of Inflation

Long Term Consequences of Inflation