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Winners and Losers from Inflation

Inflation creates winners and losers, even though that is a very controversial topic. In this post, we will speak about who benefits from inflation and understand why.


What is Inflation?

Let us first speak about what inflation is. There are two distinct, though related, concepts called inflation.

The word inflation comes from inflating. Historically, the word inflation was used when the government or central bank inflated the money supply. That is, when the amount of money in the economy increased, something we refer to nowadays as printing money.

Consequently, one way to understand inflation is simply as an increase in the amount of money that exists.

The second definition of inflation is the one commonly used in today’s world. Inflation refers to a general increase in the price of goods and services. Hence, an increase in the cost of living.

If we want to specific, the rise in prices is usually a direct consequence of the increase in the quantity of money. The old definition of inflation leads to the modern definition of inflation.

Throughout this post we will use the modern definition of inflation, i.e. a general increase in the prices of goods and services.

How is Inflation Created?

The topic of inflation is tricky, since there is a lot of ignorance about it. In fact, the system wants to keep us ignorant about inflation. We are so used to prices going up over time that we do not even question it. But most people have never asked themselves why.

The general price level in a country is primarily determined by the relationship between the amount of goods and services produced and the amount of money that exists. It really is that simple.

If there is more money in the economy, prices tend to rise. If there is less money, prices tend to go down. And, by the same logic, if there are more goods and services, prices tend to fall. If there are fewer goods and services, prices will tend to go up.

It is very important to understand those basic dynamics. It contradicts much of what the media tells us about the cost of living. Especially when we are told that there is inflation due to high economic growth.

If there is economic growth, there are more goods and services. How can prices rise in such a situation? Only if the amount of money has increased even more.

Consequently, prices do not rise due to economic growth. In fact, economic growth serves to moderate price rises. Without economic growth, prices would be much higher. As a result, while economic growth and inflation may happen at the same time, one does not cause the other.

Second, wealth is not determined by the amount of money we have. Money itself has no value if there is nothing to buy with it. Money is just a unit of measurement.

If your nominal wealth increases by 5% at the same time that the cost of living rises by 10%, you are not richer. In fact, you are poorer. Similarly, raising the minimum wage at the same time that prices go up can lead to the minimum wage being lower than before when measured in real wealth and not money.

When there is inflation and prices rise, money becomes worth less. It could even become worthless. Simultaneously way, people’s wages and savings are also worth less. And debts are also devalued: it is easier to pack our debt if the value of the money has gone down.

Another interesting aspect to consider is that, over time, assets, whether real estate, stocks or gold, tend to rise in price. But that does not mean they are worth more. In fact, if their prices go up less than the cost of living, they may be worth less.

Winners from Inflation

In the next few sections, we will discuss who benefits from inflation. Since we know there are both winners and losers when it comes to inflation, we will focus on the winners first:


The biggest beneficiaries of inflation are governments. They are also usually the ones creating inflation, either directly or indirectly. And no matter how much politicians pretend to be annoyed about it; governments benefit tremendously from inflation.

Inflation is good for governments for two main reasons: debt and tax revenues.

As we discussed earlier, when there is inflation, the value of money falls. And so does the value of debts. Consequently, for those who owe a lot of money, inflation is a way to reduce that burden without having to pay back any of that debt. It is like your debt is reduced over time.

And most Western governments nowadays are among the most indebted institutions in all human history. They are the example of how money and public resources should not be managed.

Their debts are so large that they can never be paid back without having to print money. Printing money is not a legitimate way to pay back the debt. In fact, it is like borrowing 100 and paying back 50.

At the same time, governments are big beneficiaries of inflation because inflation leads to an increase in tax revenues.

Every time we buy something, we pay a sales tax or VAT. If prices go up, we pay more sales tax and VAT. If salaries go up to make up for a higher cost of living, we will pay more personal income tax. And if asset prices go up, even if their value in real terms has decreased, we will have to pay capital gains taxes. Whichever way you look at it, governments always win in times of inflation.

People with Debt and Good Financial Situation

A group of individuals for whom inflation can be good are those who have a healthy financial situation and debt. Obviously, if they have debt and are in a good financial position, we can assume that debt has been used to acquire assets and not finance consumption.

This type of purchases is mainly about real estate and mortgage debt. Due to the monetary policies of central banks, mortgage rates over the last several years have been extremely low. And even though they have normalized slightly, taking on mortgage debt is usually a good option.

Thus, those people with attractive mortgage rates stand to benefit from inflation, as they will see the value of their debt decrease while the nominal price of their assets tends to go up. It is as though a portion of that real estate purchase is being subsidized and paid for by inflation.

At the same time, inflation will put upward pressure on the nominal wages of these people and the dividends they may receive from other assets they own, making those mortgages payments even more affordable.

While it is true that home prices are higher in the 2020s than they were a few decades ago, the combination of low mortgage rates and inflation can make real estate one of the most attractive asset classes.

Real Estate Investors

In the previous section we talked about those with mortgage debt and a good financial position. A special category of this type of individual are real estate investors. They stand to benefit disproportionately from inflation, just like governments.

Real estate investors typically finance most of their purchases with mortgage debt. The rental income they generate is used to pay for the mortgage and the rest of expenses associated with the ownership of that property. If there is any money left after, it will be direct cash flow for the investor.

If there is inflation, rents will tend to rise while the mortgage payments will remain fixed. Therefore, the difference between rental income and property expenses will increase, leaving more cash flow for the investor.

At the same time, the value of the mortgage debt will fall in real terms while nominal home prices will tend to go up. This will increase the equity that the investors owns in that property.

Therefore, if you are expecting strong inflationary pressures in the future and are able to get cheap mortgage financing, real estate may be one of the best bets.

Investors in Hard Assets

Even though real estate is considered a hard asset, it is not the only. And we talked about real estate in the previous section. We will focus on other hard assets in this section.

Hard assets are real assets that cannot be easily copied or devalued. Think of gold, silver, commodities, real estate, land, art, collectibles, or even cryptocurrencies like Bitcoin. The government cannot create more of them unilaterally, unlike money or debt.

Some readers may be wondering if stocks are hard assets. That depends on the type of company as it is not a binary answer. For example, many companies own hard assets, and we can invest in them by buying their stock. Some companies are even in the business of producing hard assets, such as those in the commodity space.

As we have already discussed, in times of inflation, both hard assets and stocks tend to rise in price. But that does not mean we are richer. If the cost of living goes up by 20%, but our investments only increase by 10%, we have become poorer.

However, in periods of high inflation, some assets tend to rise more than the cost of living. Precisely hard assets. This is because they benefit from their status as a hedge against inflation. This causes demand for those assets to skyrocket, and their prices follow.

For example, throughout the 1970s, the cost of living in the United States increased rapidly. That period became known as stagflation. It is said that, in just a decade, the price of most consumer products more than doubled.

Nonetheless, the price of gold went up by more than 20 times. This means gold would have made us richer, despite the higher cost of living. On the other hand, while nominal stock prices went up, inflation increased a lot more, making stocks a very poor investment.

Therefore, it is generally a good idea to own hard assets if we anticipate a period of elevated inflation.

Losers from Inflation

Next, we analyze who the biggest losers from inflation are. Those are the groups who suffer the most in times of elevated inflation:

Poor People

In general, the lower a person’s socioeconomic status, the more they will suffer from inflation. For this reason, poor people are the most vulnerable. Because of this reason, it is said that inflation is a highly regressive tax: it affects particularly those who have less.

Regardless of their age or life circumstances, poor people in general spends virtually all their income on life necessities every month. There is no room to save for the future.

As a consequence of that, if their basic monthly expenses are as high as their income, and the cost of living increases by 10%, they will find themselves in a very difficult positions.

Most Workers

The majority of workers tend to be negatively affected by inflation. This is true regardless of how much those workers earn. It applies to low-wage earners, people on average salaries, as well as individuals on high incomes.

The reason for their loss is because wages usually go up after inflation has taken place. If prices go up by 8%, those workers will be fortunate if they receive an 8% salary increase. But even if they do, that will happen after the fact. Therefore, workers are always catching up with inflation.

Additionally, if official inflation rates are calculated in a manner that understates inflation, wages will not increase as much as the true cost of living.

The exception to this would be those workers who are able to adjust their prices upwards immediately. For example, someone who does home renovations as a self-employed individual will be able to adjust their prices more often than an employee working for a company or a government.


Taxpayers, irrespective of how much tax they pay, are another group heavily penalized by inflation. This should not come as a surprise given that governments are the greatest beneficiaries. There are three main ways taxpayers are negatively affected when inflation is high.

First, those who have an income are going to have to pay more income taxes. Not only because nominal wages go up, but because most countries have a progressive tax system, where the more you earn, the higher percentage you pay. And they are often slow in adjust the income tax bands used to calculate the applicable percentages.

If prices go up by 8%, income tax brackets should go up by 8% as well. But that is rarely the case. Therefore, income taxpayers are progressively moved into higher income tax brackets even though their inflation-adjusted salaries have not increased.

Second, those who have investments will see that asset prices tend go up in times of inflation. But that does not mean they have become richer. Nonetheless, most governments will claim there has been a capital gain and tax it.

Third, when the price of goods and services goes up, everything we buy is more expensive. As consumers, this means we will end up having to pay more money in sales taxes and VAT.


Savers are among the biggest losers from inflation, sitting precisely on the other side of the trade as some of the biggest winners. Inflation makes money worth less. Therefore, if we have saved the proceeds of our hard work, we will see that value evaporate.

This can happen even in times of relatively high interest rates. At the end of the day, what matters to investors is the real rate of interest. This is calculated as the difference between the nominal interest rate received minus the inflation rate.

If we receive 5% interest on our savings, but inflation is running at 8%, we are losing 3% of our savings every year. If that situation lasts for a few years, the loss will be substantial. And if inflation is running much higher, savings can end up almost disappearing.

It should be noted that it is usually small savers who suffer the most from inflation. People with enough savings tend to have the resources and knowledge to invest their money and try to shield it from inflation.


Retirees and pensioners in general represent another group of individuals who suffer from inflation. These people live on a fixed income. Since they have already retired, they do not have the option to ask for a higher wage, work more, start a business or a new career.

It is true that public pensions tend to rise over time. But those increases will not be enough in the long run to completely offset a rising cost of living. Especially in those countries with unsustainable pension systems and an ageing population.

Consequently, inflation is a great tool used by government to implement pension cuts without having to admit that benefits are being cut.


One same individual can be in several groups at the same time. This is why I want to mention seniors specifically.

Older people are usually pensioners, and many of them are in the group of small savers. Therefore, both their income and small capital base get eroded by inflation.

Unless they are fortunate enough to be in a position that allows them to maintain a decent standard of living regardless of the economic circumstances, older people will see their quality of life drop in times of high inflation.

Companies with No Pricing Power

Companies can also be negatively affected by inflation. And they are ultimately made up of people, regardless of whether we are referring to their workers, shareholders, or other types of stakeholders.

Those companies with little or no pricing power are likely to suffer greatly from inflation. Pricing power is the ability to raise your prices without your sales being affected in a significant manner. For example, if Apple charged 10% more for their iPhones, most customers would still buy it.

But in many sectors, if a company raises its prices, many of its customers will simply decide to buy from the competition. This usually happens in commoditized sectors.

These types of companies can suffer a lot, since their costs may be going up due to inflation, at a time when they are unable to raise prices. This can lead to a significant drop in profits and even losses. In extreme circumstances, businesses may end up going out of business, creating a surge in unemployment.

Companies Selling Non-Essential Products

Finally, another type of company that can suffer considerably from inflation are those that sell non-essential products and services to average consumers.

There are many non-essential things in today’s world. But if our customers are billionaires, our sales are unlikely to get affected. Billionaires are perfectly able to weather inflationary periods.

However, if we sell our products to average consumers, our sales will probably take a hit. Those families who spend all of their monthly income, most of it on necessities, are likely to cut back on non-essential items if the cost of those things that are most important increases significantly.

These companies are usually in the category of consumer discretionary stocks.

Myth about who benefits from inflation

Finally, I would like to debunk an important myth about the winners and losers from inflation. Or rather point out that a group of individuals generally portrayed as winners, are not really so.

Most rich people do not benefit from inflation. Apart from leveraged real estate investors, who will see their debts go down in value while their rental income increases, most asset owners are not in that position. Imagine someone who owns five mansions and two yachts with a total market value of $50 million.

If there is a decade of high inflation and the price of those assets increases to $200 million, many, especially politicians and people who know nothing about economics, will claim that “this individual has made $150 million and must pay their fair share in taxes.” However, that rich person still owns the exact same five mansions of two yachts. And we could even argue those assets are now worth less, as they are now older and will have depreciated.

This is the reason why the combination of high inflation and taxes on capital gains can be so dangerous. The tax system may see a capital gain where, in real terms, an asset may now be worth less.

This is not to say that rich people suffer in times of inflation. Far from it. The rich, as long as there is social stability, tend to simply be immune to inflation.


As we have seen, inflation creates both winners and losers. An individual may be part of several of these groups simultaneously. They could benefit from inflation in certain aspects and suffer from it in other areas.

The idea of this analysis is to understand how inflationary forces end up moving resources from some groups to others. Unfortunately, most groups on the losing side of inflation are people who have done things right: working people, taxpayers, savers.

On the side of winners, the government stands out the most. Governments not only benefit from inflation but, in most instances, also create it.

Therefore, inflation is a net negative for society. Prosperous, stable and happy countries tend to have the lowest inflation rates in the world. Conversely, we do not see any countries doing well while experiencing high inflation rates.

This underscores the importance of having a sound monetary policy. Not only is this important for economic activity but has wider societal implications.

I hope you found this analysis about the winners and losers from inflation insightful, and encourage you to subscribe to my newsletter:
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