Who Benefits From High Inflation?
Updated: Sep 2, 2022
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Given the prospects of higher interest rates, savers who for the last ten years have been complaining about the paltry income they have been receiving on their cash must finally be rubbing their hands with glee, right?
Sadly, not. In fact, as a result of high inflation, interest rates in real terms are even more negative than they were before so the situation for them has deteriorated further not improved.
If savers do not benefit from high inflation and the associated progression (sic) of real interest rates into even more negative territory, who does?
Some see inflation as a zero sum game: a change in the price of a good or service simply redistributes wealth between buyer and seller. But this is simplistic. And wrong.
What matters is not whether inflation is a zero sum game but real income. Most of the time, total real income aka GDP is rising and thus is a positive sum game - we make things that others want, and we find ways to improve the quality of these things as well as make them more efficiently so we can then spend time making new things. In other words, our lives in aggregate get better not worse.
This virtuous system however tends to rely on prices in general remaining fairly stable - it is felt that inflation of around 2% is optimal.
However, when inflation deviates significantly from this optimal level, up or down, the system is disrupted and wealth gets destroyed rather than created. Indeed, total global real income - GDP - is almost certainly now falling because of high inflation and thus life is getting worse for most not better.
Most, but not all.
The biggest beneficiaries in the current environment will be those who sell things that people still need, who sell things that are rising in price, and who have lots of fixed rate long-term debt.
There must be some emerging and developing commodities-based countries and companies out there who are rubbing their hands...
The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.
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