Who is impacted most by inflation?

It doesn’t matter what reasons we’re hearing for it, there’s one thing that’s evident every day. Prices, for just about everything, are going up! It should not come as a surprise to anyone who didn’t literally sleep through the debacle of 2020. With the government printing money and practically throwing it out of airplanes to a broad population—many not even in need of help—inflation was an inevitable outcome. This article will explore who is impacted most by inflation.

counting money in inflation
Photo by Sharon McCutcheon on Unsplash

Inflation occurs when the purchasing power of your money is diminished as the price of goods and services increase. Prices increase when the demand outstrips supply for a variety of reasons. In today’s environment, we’re seeing prices go up with supply chain disruptions being one of the most referenced reasons. Prices also go up when there’s a lot of extra money in the system for people to spend on goods and services. Thanks to COVID, there seems to be a lot of “extra” money from programs put in place to help reduce the burdens resulting from the pandemic.

Inflation rates are accelerating

According to the Department of Labor Statistics, the annual inflation rate in the US accelerated to 5.4% in June of 2021 from 5% in May, the highest since August of 2008. Since February 2020, prices for food increased 5.4 percent, energy prices increased 8.9 percent, new vehicles prices advanced 5.3 percent and used cars and truck prices increased 43.3 percent.

Inflation impacts us all. Anyone who has bought gas or lumber, gone grocery shopping, or tried to contract for services has probably felt it in their wallet. My wife recently looked at renting a car for a five-day trip in Montana and was sticker shocked by the $3000 estimate!

Inflation winners and losers

Those most impacted by inflation are flat-wage earners, retirees, and others on fixed incomes. Their income doesn’t go up just because the cost of fuel or bananas goes up. Others who see a more immediate negative side of inflation are those sitting on a lot of cash—that pile of savings simply won’t buy as much as it did a year ago.

On the upside, inflation encourages people to buy things that don’t fall in value rapidly. It’s particularly beneficial to people who, for example, purchased a home just before the housing market took off and mortgage rates began rising. The value of borrowed money is now higher than the value of the money they will pay back in the form of monthly payments–at least for now. The government also is a winner in inflation as interest rates go up and individual earnings increase pushing people into higher tax brackets.

We have been blessed with low inflation of around 2% over the past 20 years. Many financial plans used this low inflation rate in their projections. Ask your advisor to rerun your financial plans with higher inflation assumptions to see how this impacts your financial picture.

As seen in The Racine Journal Times | August, 2021

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