This year inflation has reached a nearly forty year high and the consequences are having a substantial impact on the economy, but who does inflation affect?
Overwhelmingly, inflation is negatively affecting those of lower economic status, those with savings, and workers on fixed incomes. While having a few positive effects on land owners and debtors paying back debts at a fixed rate.
But as inflation continues to raise the cost of goods and services across the country, its impact is being felt differently across the economic spectrum.
Lower Income Earners
Despite rising minimum wages and salaries the value of what that money can buy has decreased by 10%.
For lower income earners the hardest hit expenditures come from food, gasoline, and housing. Areas in which both lower and middle class families have to concentrate a higher percentage of their monthly earnings.
The Pandemic Effect
Not only did the global pandemic see economies shut down and jobs lost, but a breakdown in the basic supply chain. All of which disproportionately impacted lower income earners’ daily needs the hardest.
Some retail and service industry jobs were either drastically cut back or never came back. Many of these jobs are not unionized leaving the workers with less bargaining power and protection than their union counterparts.
Those who made their living driving trucks or working in food production found pandemic era rules and regulations limiting their operations. An unusually high number of farms and food processing plants either discontinued operations or closed.
When supply drops and demand stays the same expect the price to go up.
Transportation and shipping issues backed up ports and limited delivery to shelves, causing a climb in price as consumers still had a demand to meet.
Limiting supply and increased demand increased the price of almost all goods and services. Those with less disposable income immediately felt the consequences.
Many have had to make difficult financial decisions and change lifestyle habits in order to cope with the inflation. From what’s for dinner to lesser activities, habits have had to change out of financial necessity.
Eating Away At Savings
Although having savings is generally considered a great asset, due to inflation the purchasing power that savings has has now been reduced.
Unless your rainy day savings has an interest rate higher than that of the rising rate of inflation, your savings now is worth less than it was last year.
Since the 1940’s the purchasing power of the U.S. dollar has been on a steady decline. As we enter our second straight financial quarter of negative GDP growth (the definition of recession), inflation rises and the decline steepens.
Young People Using Their Savings
According to Forbes about two out of three Americans have already dipped into their savings to deal with inflation.
Younger people are far more likely to have recently relied on their savings. In recent years this same demographic took an interest in the stock market after trading became more accessible via phone apps.
Many young and new investors bought into the stock market during the hype of the “meme stock” trend or cryptocurrencies.
Relying on the idea that the market would be a way to actively grow savings, millions of shareholders have gotten out as inflation and economic uncertainty made their way to wall street. Most have cashed out at a loss.
Fixed Income Workers Hit Hard
Those without the benefit of diversified financial assets, property, stock market investments rely solely on their checks from work to balance their budgets.
From school clothes to a Saturday night at the movies, the more inflation continues to push prices up the less those fixed income earners can afford.
During the pandemic both Democrats and Republicans supported stimulus checks and increased unemployment payments to ease the financial consequences of the lockdowns.
The Fed’s Printing Money
As a result the Federal Reserve increased the printing of the U.S. dollar to supplement the payments instead of relying on the traditional metric of value of goods in exchange for service.
This results in a devaluation of that dollar, and the paycheck you rely on to survive suddenly doesn’t go as far as you’re used to.
Many families have been forced to change habits such as going out to eat, summer vacations, and delaying upgrades and investments such as cars.
On average, Americans are driving a car that is at least twelve years old. This is in small part because of better quality vehicles being produced.
In large part because the increased prices of cars, particularly used cars, has grown beyond a fixed income pocketbook.
Who Does Inflation Help?
There are some that actually benefit from inflationary raises:
- Those who hold high debt on fixed plan
- Governments that public sector debts
- Land owners
Individuals or companies that retain debt on a fixed plan will have the benefit of paying an interest rate lower than the rate of the rise of inflation.
As the value of the currency lowers, the fixed interest on what you will pay on that debt stays at the rate agreed upon before inflation hits.
Government Paying Back Debts
The government operates in a similar way with its public sector debts. As inflation eats away at the value of peoples savings it eases the financial burden of having to pay large sums of debt in the future.
The debt the government currently holds in the public sector is substantial, but as real wages fall and nominal wages rise the debt amount becomes more manageable.
There is more money available for the government to now pay the debt regardless of the now lessened value of that money.
A Rise In Property Value
Property ownership is an enormous asset. As interest rates rose after the pandemic and inflation set in, so did home values. Most homeowners that bought before 2020 found themselves locked into a much lower interest rate than is currently being offered.
And as the cost of living and building supplies rose, so did home prices. Home owners also avoid the burden renters faced nationally, as rents rose on average 13.4% in 2021. The average farm real estate rose 12%.
Conclusion
With inflation comes economic uncertainty. Consumers worldwide are facing rising costs for their everyday goods and services. While inflation may help a niche few, it has an overwhelmingly negative impact on an economy.
Addditional Sources:
Who are the winners and losers from inflation? – Economics Help
Inflation hurts low-income Americans most – The Washington Post
Amercians are driving older cars. COVID accelerated the trend. – Marketplace
2 Out Of 3 Americans Are Spending Their Savings Because Of Inflation – Forbes Advisor
