Inflation Is Good Sometimes—But Who Is It Good For?
Experts say there are times when inflation can benefit the economy, but who is it good for? Here's a look at all things inflation and what you can expect.
Fed officials have slowly increased median forecasts for core inflation in 2022. What started as 1.8 percent a year ago has now been nudged to 2.3 percent as of late September. This means heightened rates of inflation will last longer than many experts predicted.
Despite its horn-wearing persona, economists say that inflation can be good sometimes. But when and, perhaps more importantly, who for?
Here's when inflation is a good thing (in theory)
Many times, inflation can burden the economy with high prices because wages can't keep up. However, if there are unused resources and labor, that means the economy isn't running full throttle. In that case, inflation might be a good thing. This is because inflation helps more money circulate in the economy, which supposedly propels spending, demand, and production (in that order).
Of course, economic scenarios like this are largely theoretical. The reality depends on the unique attributes of the time period and what's pushing inflation in the first place. Like anything with the economy, there isn't a clear-cut answer that wins every time.
One type of person who benefits from inflation—debtors
Inflation means that the dollar is worth less than it used to be. During periods of high inflation, this point becomes even clearer. For people who owe money, that's a good thing.
If you owe money and decide to repay your debt amid heightened inflation, you're using funds that are less valuable than the money you initially borrowed. While it can be difficult to understand this when the dollar values are in front of you, knowing that you're actually getting a good deal can fuel your decision to pay off that debt quicker.
Producers benefit from inflation, too
If inflation does, indeed, increase spending, demand, and production, then producers (of goods or services) would benefit. These producers are necessary to increase economic capacity. They can simultaneously profit off of the demand that inflation causes.
These ebb-and-flow moments in production also help producers profit more. If production remained high all the time, consumers would put off spending in hopes of getting a better deal on whatever it is they're buying.
If demand gets high enough, producers can charge more for their products, sometimes even on top of inflation rates. That would increase their profit substantially.
What about consumers?
Unless a consumer is in debt or simultaneously profiting off of production or labor, inflation isn't a good thing for the sector. To counteract this, consumers can become investors by holding on to assets in an inflated market.
How inflation can benefit investors
Certain assets increase in value during particularly inflammatory economic periods. By holding on to these assets, investors can reap the capital gains that accompany the position.
Types of assets might include consumer staples stocks, energy, technology, consumer goods, commodities, and real estate—just to name a few. Do your own research on specific investments before making the leap. As a hedge against inflation, investing can be empowering for the average consumer.