September 25, 2022

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3 upsides to high inflation

Rising prices are undoubtedly a problem. Annualized inflation is now 7.5%, the highest level since 1982. Painful price hikes are hitting everyday bills such as food, home heating, rent and gasoline, which makes this an acute problem for President Biden and his fellow Democrats. If inflation stays this high for most of 2022, it will probably spell doom for Democrats in the November midterm elections.

High inflation isn’t bad for everybody, however. Here are 3 beneficiaries of rising prices:

Homeowners. If a valuable asset appreciates in price, while the financing for that asset remains fixed, the owner is getting ahead. And that’s the position many lucky homeowners are in. Home prices are rising by nearly 20% per year, which is hell on buyers but a big wealth boost for current owners. The government measure of housing inflation is smaller, at 5.7%, because most people don’t buy a home every year and the change in housing costs isn’t the same as the change in home prices. Even at 5.7%, housing costs are a big contributor to overall inflation, since they represent the biggest monthly bill for most Americans.

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More than one-third of the 79 million U.S. homeowners own their property outright, without a mortgage. Most homeowners with a mortgage have fixed-rate loans, and many of those have refinanced within the last few years to lock in historically low rates that will never go up, regardless of how high inflation goes. Most of those homes are appreciating at a higher rate than the mortgage, adding to wealth.

The value of household real estate has grown by 20% since the start of the COVID pandemic in 2020, to $41 trillion. Tappable home equity—the amount owners can borrow against—soared by $2.6 trillion in 2021 to $9.9 trillion. Home equity can be an important source of spending, if owners want to use it, and even if they don’t, it contributes to the “wealth effect” that makes people feel better off. This doesn’t help renters and it’s a negative for people who want to buy a home but can’t afford it. For a big chunk of the US. population, however, it’s a windfall.

Workers (eventually). Inflation affects wages in at least two ways. Sometimes rising wages are the main thing causing inflation, as employers have to pay more to get the workers they need, which raises labor costs and ultimately the prices consumers pay. That is not what’s happening now. Other factors, such as supply-chain disruptions and surging demand for goods, are causing inflation, which in turn is starting to push wages up.

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Pay increases are not keeping up with inflation at the moment. Average hourly earnings are now growing by 5.7%, more than double the average of the decade before COVID. But that’s still less than 7.5% inflation, so the typical worker is falling behind. If inflation eases, however, that’s when workers could end up better off. Wages tend to be “sticky,” which means employers don’t normally lower them when other costs go down. If inflation eases by two points and wages stay where they are, it will start to be a net gain for workers. If inflation drops back to the 2% level it was at a year ago, workers will be even better off. There’s a decent chance inflation will ease by later this year, since some of the current surge in inflation is due to anomalies, such as a shortage of semiconductors, that ought to get ironed out eventually.

People who benefit from rising interest rates. Interest rates usually rise amid inflation, and that is already happening as financial markets price in a shift in Federal Reserve policy from loosening to tightening. Long-term rates such as mortgages are up nearly a full percentage point during the last couple of months, and short-term rates will rise too as the Fed hikes those directly, starting in March. Higher rates will slow debt-fueled spending, but if they get high enough they’ll produce a bit more income for fixed-income savers who have been getting returns close to 0. Rising rates could make the U.S. dollar stronger against other currencies, discounting the cost of travel for Americans heading abroad. It’s also possible borrowers who were unable to get a loan with rates low might find banks more willing to lend as the return to the bank rises.

Modest inflation of 2% to 3% is ideal, and almost nobody would choose bigger price hikes over smaller ones. But those benefiting from higher inflation ought to be able to keep spending going as others cut back. With luck, the months ahead will provide some relief that benefits everybody.

Rick Newman is a columnist and author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips.

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