Who Benefits From Inflation? 7 Biggest Winners and Losers

March 1, 2023

For the average consumer, “inflation” means a higher cost of living. But did you know that certain investors and sectors actually benefit from inflation?

Savvy investors can mitigate the losses by identifying sectors that may positively benefit from inflation. Those invested in energy companies may benefit from a rise in energy stock prices due to increased gas prices.

In this article, we’ll tell you who loses and who benefits from inflation.  

We’ll cover its causes and types, its positive and negative effects on the economy, and how the Fed regulates inflation. We’ll also reveal how you can invest in an inflation-proof asset — fine art

Who Can Benefit From Inflation? 7 Biggest Inflation Winners

Here are the seven winners who can actually benefit from inflation.

1. Collectors

2. Borrowers With Existing Fixed-Rate Loans

3. The Energy Sector

4. The Food and Agriculture Industry

5. Commodities Investors

6. Banks and Mortgage Lenders

7. Landowners and Real Estate Investors

1. Collectors

Historically, collectibles like fine art, wine, or baseball cards can benefit from inflationary periods as the dollar loses purchasing power. 

During high inflation, investors often turn to hard assets that are more likely to retain their value through market volatility. 

Since collectibles aren’t directly correlated to traditional markets, these assets may be safer from significant value fluctuations.

Fine art had an average yearly appreciation of 33% the last time inflation was this high, according to Masterworks’ All Art Index. In fact, Masterworks‘ last three exits netted investors 13, 17 and 21% returns, despite the bear market.

However, buying collectibles can have a high barrier to entry, as top collectors can afford to hire advisors, take time to learn about their collection, and build a collection of breadth and depth.

Investing with a service like Masterworks gives retail investors access to industry experts and professional advisors, side-stepping many of the pitfalls of a beginner collector.

2. Borrowers with Existing Fixed-Rate Loans

When inflation increases, the Federal Reserve often raises interest rates to discourage borrowing, which is known as hawkish monetary policy.

This can adversely affect future borrowers, but anyone with a fixed, low-interest loan or fixed-rate mortgage won’t be affected. 

Plus, since currency loses value during inflationary periods, borrowers will actually pay lower real interest on their fixed-rate loans.

3. The Energy Sector

Even with high inflation and rising energy costs, consumers and producers still have to fill their cars with gas and use energy to power operations. In other words, energy demand rarely drops during inflationary times. 

So, when energy costs go up, energy companies can raise prices to maintain or even increase their profits. This passes on those energy costs to consumers and ultimately benefits energy investors.  

4. The Food and Agriculture Industry

Individuals may opt-out of expensive food options such as eating out when consumer prices are high. However, food manufacturers and the agricultural supply chain can benefit from inflation. 

Consumer staples such as food are resistant to inflation because their products are always in demand. 

Agricultural companies also benefit from inflation-driven higher prices. So agricultural stock investors can take advantage of rising price levels and a higher profit margin since the higher production costs are passed on to consumers. 

5. Commodities Investors

Commodity prices track the inflation rate closely. They’re often considered indicators of inflation as they impact the future prices of processed goods.

When the prices of commodities go up due to a higher inflation rate, commodity investors can easily profit from selling their stocks.

6. Banks and Mortgage Companies

When the Fed raises interest rates during high inflation, it impacts everything from credit card debt to variable-rate loans. 

Lenders can introduce a higher interest rate on existing variable-rate loans — allowing them to collect more interest. 

When consumer prices rise, people tend to spend their savings and rely on credit to get by. This can mean higher credit card balances and more applications for personal loans. The demand for home equity lines of credit and other types of credit can also increase. All of this brings in more cash for banks and lenders. 

Borrowers may also take longer to repay debt. They might need to spend more on necessities, which leaves less for saving or repaying debt. When more borrowers pay only the minimum amount every month, lenders can get more interest from them. 

7. Landowners and Real Estate Investors

When inflation is high, savings and other liquid assets can lose value fast. 

However, physical assets like land tend to hold value remarkably well during volatile times. The demand for real estate can even increase when inflation is high – driving up land prices even higher. 

What’s more, landlords tend to increase rents during inflationary periods. If they have fixed mortgages on their rental properties, that adds up to an even higher real income.

Now, let’s look at who’s adversely affected by inflation.

Who is Hurt by Inflation? 7 Biggest Inflation Losers

Here are seven stakeholders that lose out from inflation.

1. Renters

2. Savers

3. Retirees and People Earning Fixed Income

4. First-Time Homebuyers

5. Long-Term Bonds

6. Credit Card Borrowers

7. General Economic Confidence

1. Renters

For homeowners, monthly mortgage payments generally stay the same during periods of high inflation. That’s unless property taxes increase or they have an adjustable-rate mortgage (ARM). 

However, those of us still renting are less fortunate. Once leases end, landlords can raise rent with little to no limit, depending on the local laws.

The July 2022 Consumer Price Index (CPI) report showed rent increasing by 6.3% annually, the fastest pace since 1986 and 0.7% higher than in June 2022. 

For residents of cities with a high cost of living, like New York City and San Francisco, the rent increases are worse. The average monthly rent for an apartment in Manhattan surpassed $5,000 in July 2022 for the first time, a 29% annual increase.

2. Savers

When inflation keeps rising, the Federal Reserve can’t change interest rates fast enough to keep up. This means that the money in your savings accounts gradually loses purchasing power.

Source: St. Louis Fed FRED, Bureau of Labor Statistics, 1940-2022, as of 08/12/2022

The above graph shows the purchasing power of a US dollar indexed to the 1982 dollar. During periods of higher inflation, the value of the dollar falls — between 1940 and 1982, the value of one dollar fell 85% from 700 to 100.

Savers can hedge against inflation if they earn an interest rate on their savings that’s higher than inflation. However, this isn’t likely when inflation is over 8% — as it is in 2022.

3. Retirees and People Earning Fixed-Incomes

If your income stays the same when price increases start, you could be in trouble. 

Inflation causes price levels to rise, lowering the real value of money and your purchasing power. 

So if inflation leads to a 5% increase in consumer prices, you can afford 5% less than you did earlier unless your wage increases. 

This is a massive problem for people in retirement and those with a fixed income (especially for individuals living on social security). 

Social security benefits usually include a cost of living allowance. However, expenses can balloon above the adjusted social security allowances during high inflation. 

4. First-Time Homebuyers

You might have to hold off for a while if you’re looking to buy your first home during a high inflationary period.

First-time homebuyers face a significant disadvantage since annual inflation causes home prices to rise. Combine this with higher mortgage rates and a depreciation in the currency’s value, making it nearly impossible for first-timers to buy real estate.

5. Long-Term Bonds

In a high-inflation environment, fixed-income prices often contract when the central bank raises interest rates. 

Long-term bonds are the most impacted by rising interest rates due to the bond’s duration. If investors rely on coupon bond payments, they may lose and feel the adverse effects of inflation.

6. Credit Card Borrowers

Most credit cards have a variable interest rate linked to a major index like the prime rate. This means cardholders will experience quickly climbing rates and higher payments as interest rates rise.

7. General Economic Confidence

If you’ve opened any social media or news source in the last months, you’ve likely been flooded with commentary regarding the current high rate of inflation. 

When inflation is high, markets tend to be volatile as consumers worry over the possibility of higher rates, a recession, and even their own ability to pay their bills.

Uncertainty rises for consumers, banks, and companies alike. High inflation can create a reluctance to invest, leading to lower economic growth and less job availability. Lines at food banks tend to be longer, and inflation expectations among the population tend to rise. 

Much of these impacts are caused by a lack of confidence in the future of the economy — and can become a self-fulfilling prophecy.

Now, let’s take a look at the different causes and forms of inflation.

Causes and Types of Inflation

Economists identify two different types of inflation:

Cost-push inflation

This type of inflation is caused by rising production costs.

It occurs when the costs of production, like wages and raw materials, increase. The demand for products doesn’t change, but the supply reduces because costs are high. The increased production cost is passed on to consumers through higher prices for finished goods.

Demand-pull inflation

This type of inflation is driven by increased demand for goods and services.

A demand-supply gap causes the prices of goods and services to increase because people are willing to pay more to buy what they want.

Can Inflation Be Good For the Economy?

Inflation can be healthy for the economy when it’s low and consistent.

The Federal Reserve (the US central bank) uses monetary policy to keep inflation in a target range of around 2% to help boost economic growth.

Mild inflation increases short-term demand and ensures consumption rates remain stable. This is because consumers would rather pay now than pay more for goods later. 

As a result, demand remains consistent, and manufacturers and producers enjoy a higher profit margin and hire more workers to meet demands.

Inflation is also more beneficial for the economy than a deflationary situation. 

Deflation refers to a scenario where prices fall. Consumers anticipate a further price fall and hold back on purchases when deflation occurs. These declines cut back demand, making companies produce less, profit less, and lay off workers — leading to a drop in economic growth.

When Is Inflation Bad For the Economy?

Inflation can hurt the economy when it exceeds the planned inflation rate of 2%. (The central bank of the US, the Federal Reserve, has set an official inflation target of 2% since 2012 to ensure price stability.)  

A higher inflation rate can negatively affect the real value of income, interest rates, employment rates and consumer confidence. 

Here’s how the different stages of higher inflation can affect the economy:

  • Walking Inflation (3-10%): People buy more than they need to avoid future price increases. This increased buying behavior derails price stability and makes demand go up further — and suppliers have difficulty keeping up. 
  • Galloping inflation (Over 10%): Currency loses value fast and everyone’s real wage decreases when inflation rises over 10%. Businesses and employees can’t keep up with the higher prices of supplies and consumer products. Foreign investors avoid investing in the economy, and governments lose public trust. 
  • Hyperinflation (Over 50% per month): Hyperinflation is a rare situation where price increases skyrocket to more than 50% every month. At this point, many businesses shut down, and people can’t afford necessities. 

How Does the Government Measure Inflation?

The Consumer Price Index (CPI) is a monthly index used by the US Bureau of Labor Statistics (BLS) to measure the inflation rate. The index is calculated by surveying households and tracking spending on goods and services. However, the CPI excludes indirect expenditures such as medical care. The basket of goods is adjusted to maintain consistency in the measurement of price changes.

An alternative inflation metric is the personal consumption expenditures price index (PCE), which provides a more comprehensive view of price changes by considering a broader range of expenditures. The PCE is the preferred measurement of inflation by the Federal Reserve. The Commerce Department releases its monthly PCE estimate as part of its income and spending report.

How Does the Fed Maintain Low Inflation?

The US inflation target of 2% is for the core inflation rate, which removes the effect of volatile energy and food prices.

The Federal Reserve bank enacts monetary policy to keep inflation around the target range. A higher interest rate is implemented when inflation exceeds the Fed’s target. When inflation starts to drop, interest rates are lowered.

Recently, the United States Congress passed the landmark Inflation Reduction Act of 2022 to help the Federal Reserve bank combat rising inflation. This act focuses on improving price stability through investments in clean energy and reductions in prescription drug prices.

The Inflation Reduction Act makes medical drug manufacturers pay rebates for medicines included in Medicare Part D. The act also includes tax credits for investments in clean energy to help fight climate change. 

While the Federal Reserve bank can raise rates to control rising price levels, you still have to save your portfolio from losing value. 

Let’s look at one of the best alternative assets you can invest in during inflationary times

One of the Best Ways To Hedge Inflation: Investing in Fine Art

Contemporary art as an asset class has shown steady performance over the years. 

According to the Masterworks All Art Index, during times of high inflation: 

  • Contemporary art prices appreciated at a rate of 17.5%.
  • Contemporary art also appreciated more than the S&P 500 and other inflation hedges like gold over the last 26 years. 

So, how do you start investing in fine art?

That’s where Masterworks comes in.

Invest in Shares of Art via Masterworks

Masterworks is a platform built for investors to invest in shares of iconic artworks. 

This is how Masterworks brings contemporary art to everyday investors:

  • They research artists’ markets with the highest potential to appreciate in value. 
  • They acquire, securitize and offer artwork to interested investors. 
  • Investors get the option to buy and sell shares on the Masterworks platform or wait until the painting is liquidated to receive any pro-rata profits.

Here’s what makes Masterworks special:

  • Users can access Masterworks’ price database to understand how artworks of blue-chip artists have sold at public auctions over the last 25 years.
  • Masterworks has a team of professionals dedicated to finding artwork with high potential for appreciation.
  • You can access the first-ever secondary market for shares of artworks.
  • Masterworks charges low management fees of 1.5% a year (paid in equity) and a 20% portion of future profits. 

Help Weather Inflationary Storms through Fine Art Investments

High inflation levels can mean trouble if you’re not prepared. 

Rising price levels and decreasing real value of income may cause people to lose out during inflation.

Invest in asset classes like art to keep your portfolio afloat during higher inflation periods. And if you want to invest in shares of fine art, look no further than Masterworks.

involves risk. See important disclosures at masterworks.com/cd

*[Please note: All investing activities involve risks and art is no exception. Risks associated with investing through the Masterworks platform include the following: Your ability to trade or sell your shares is uncertain. Artwork may go down in value and may be sold at a loss. Artwork is an illiquid investment. Costs and fees will reduce returns. Investing in art is subject to numerous risks, including physical damage, market risks, economic risks and fraud. Masterworks has potential conflicts of interest and its interests may not always be aligned with your interests.

Liquidation timing is uncertain. Expenses and fees are listed in our Offering Circulars. Note: Fees are 1.5% per annum (in equity), 20% profit share, and certain expenses are allocated to the investment vehicle. Investors should review the offering circular for a particular offering to learn more about fees and expenses associated with investing in offerings sponsored by Masterworks. Masterworks will receive an upfront payment, or “Expense Allocation” which is intended to be a fixed non-recurring expense allocation for (i) financing commitments, (ii) Masterworks’ sourcing the Artwork of a series, (iii) all research, data analysis, condition reports, appraisal, due diligence, travel, currency conversion and legal services to acquire the Artwork of a series and (iv) the use of the Masterworks Platform and Masterworks intellectual property. No other expenses associated with the organization of the Company, any series offering or the purchase and securitization of the Artwork will be paid, directly or indirectly, by the Company, any series or investors in any series offering. For more information, see “IMPORTANT DISCLOSURES” at Masterworks.com/cd

This post was sponsored by Masterworks

A published financial writer based in Brooklyn, dedicated to navigating the intricate world of markets and money. I aim to dissect the complexities of finance, offering readers a clearer lens into the economic tapestry we all navigate.