This text is taken from Courrier de l’ économique. Click here to subscribe.
Who benefits the most from inflation? The value of things does not evaporate, it moves. The question is: to whom?
Inflation does indeed create winners and losers. But ultimately, everyone comes together when it leads to a recession.
The big losers are consumers and households. Wages are increasing less quickly than prices. This results in a loss of purchasing power, the erosion of which will be felt more by households with modest incomes. As essential or primary goods such as energy and food take up a larger share of their budget, they are particularly affected. Moreover, all people whose income does not follow prices or increases according to a lagging effect are losers. This applies to beneficiaries of non-indexed pensions and benefits.
As for savers, inflation will particularly penalize those who have made investments at fixed rates or in bonds, with inflation potentially even pushing the real return into negative territory. Not to mention that the market value of fixed income or resale securities before maturity will also fall under the effect of the rise in interest rates which generally accompanies a fight against inflation by central banks.
On the other hand, new savings and variable rate investments will benefit from this rise in the cost of money.
For those who have already taken out a loan, the nominal value of the fixed-rate loan remains unchanged, but its real value will be lowered by the inflation rate. They are, as a general rule, advantaged, provided that their wages follow the rise in prices.
On the investment side, stocks tend to be more resilient than bonds. Inflation reduces the nominal value and that of the coupon paid to bond holders (except those indexed to inflation). In addition, bonds already issued will see their price fall if there is an increase in interest rates, the price of these securities moving inversely to the movement in rates.
For their part, stocks benefit from nominal growth in corporate profits, but only to the point where economic activity begins to weaken under central bank intervention. In addition, an excessive slowdown in economic activity may force companies paying a dividend to reduce it, or even cancel it.
In real estate
For its part, real estate is often seen as a safe haven and inflation is generally favorable to owners. Years of high inflation, such as those of the 1980s, were conducive to the acquisition of real estate by borrowing, and this was especially true for rental property. It has been said previously that inflation reduces the real value of a fixed rate loan.
More generally, and in summary, inflation initially benefits raw materials, rental real estate, the stock market and companies able to transfer the increase in the prices of their inputs to their customers or whose Income is correlated with inflation. The rise in interest rates, which echoes this general rise in prices, will generally benefit financial institutions and savers with liquidity, but not the stock market.
And the government?
For their part, governments are seeing their tax revenues increase due to inflation, a gain attenuated, however, by the increase in spending and indexed benefits. For its part, the interest expense on government debt increases with the increase in interest rates that generally follows, but the effect is only partial. This increase only affects renewal and new debt, and not existing debt. Without forgetting that inflation has the effect of reducing the real value of the liabilities held.
Especially since it is the nominal (income or real GDP to which inflation is added) which counts in public finances. Inflation therefore reduces the weight of the debt and its burden in proportion to income or nominal GDP.
But this “immunity” granted to the winners is entirely relative, the deceleration of economic growth, even recession, affecting everyone to varying degrees. The only ones who can do well are those who have good liquidity and are able to seize the opportunities that arise.