Hooray for Inflation?

Jonathan Clements

IF YOU’RE AN OWNER of financial assets, inflation doesn’t offer much reason to cheer. Lost 16% on your bonds this year? Once you factor in inflation, the hit to your bond portfolio’s real, inflation-adjusted value would be more than 20%.

By contrast, if you’re a borrower, inflation is a bonanza. Suppose you owe $2,000 every month to the mortgage company on your fixed-rate loan. As inflation climbs, your mortgage payment stays the same—but, if your income rises with inflation, it’s now a whole lot easier to make that monthly payment.

That raises an intriguing question: Who’s the biggest beneficiary of this year’s inflation? According to the Federal Reserve, households have $18.6 trillion of debt, businesses have $19.5 trillion, and federal, state and local governments have almost $29.6 trillion.

Before you declare, “Of course, the government is the big winner,” recall that this $29.6 trillion debt is owed by all of us collectively. In other words, your Treasury bonds may be worth less because of inflation, but your share of government debt has also fallen in inflation-adjusted terms.

In fact, after factoring in the 5.9% inflation we’ve seen in 2022’s first nine months, the federal government’s $26.3 trillion debt has effectively shrunk by some $1.5 trillion—more than was added by the $946 billion annual budget deficit. But that silver lining may soon lose its luster: With Treasury yields on the rise, the federal government will be paying significantly more to service its massive debt.

Household and business debt are also now less burdensome in inflation-adjusted terms, a bonus for profligate consumers and those with mortgages, and also a potential help to corporations and their shareholders. Still, since the 2008-09 Great Recession, even as the federal government has gone on a borrowing binge, households and corporations have been relatively debt averse, so inflation isn’t as big a benefit as it might have been.

So, should we cheer for inflation? Absolutely not. It’s a disruption to the economy, a hit to consumers and a tax on savers. But make no mistake: There are some winners. With no debt and a fair amount of financial assets, I—alas—am not among them.

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