During inflation, most physical asset classes increase in value. In general, the rich benefit the most from inflation because they tend to have the highest share of assets as a financial class of people. Many times the wealthy also use debt for leverage, and inflation also depreciates the monetary value of that inherited debt.
The working class can lose purchasing power in high inflation environments as their wages lose purchasing power and rents increase.
High inflation punishes currency holders and earners and rewards asset holders.
5 Ways the Rich Make Money With Inflation
- Real estate
- Business ownership
- Asset value increases
- Purchase of Value Shares
- Debt Impairment
Wealthy people can benefit from their large homes appreciating along with real estate and other real estate assets, at least in line with the rate of inflation. Their homes may also increase in value following the replacement value of their home if building materials such as wood increase in value and construction labor increases in value.
Real estate is also a buffer against rental inflation for the rich, their mortgages keep their personal payments the same, but they can raise rents on any rental property they own to keep up with inflation.
The wealthy who own businesses have pricing power for the goods and services they provide. Manufacturers have the ability to raise prices to keep up with their costs. Manufacturers have the advantage of both setting prices based on demand and profiting from any cost deviations from supply and demand by their competitors and vendors. Wealthy entrepreneurs in commodity industries can increase profit margins in inflationary environments.
Being a business owner can help keep cash flow in line with inflation by adjusting business operations. This is something that employees cannot do with earned wages.
Consumers do not have the advantage of choosing the prices of the goods and services they must buy. Consumers have more power over their decisions about when and how much to buy discretionary goods and services.
Asset value increases
Wealthy people with large amounts of assets can substantially increase their net worth in real dollars or nominal terms, depending on whether they own a commodity-based or labor-intensive business. Commodity-based businesses tend to increase their cost of market capitalization during inflationary periods when the products they sell grow faster than their fixed operating and labor costs.
On the other hand, businesses that have their labor and wholesale product costs rising at a faster rate than what they can raise prices for will see their profit margins suffer during inflation.
Purchase of value shares
Inflation causes a substantial decline in the market value of a stock, from 20% to 50% or more. Inflation erodes the profit margins of most publicly traded companies because their costs rise faster than their ability to raise prices. Shares of companies with consumer discretionary goods and services could be hit the hardest, as consumers spend all their money on essentials like food, utilities and rent, and have to cut back on many extras.
The wealthy who went to cash out of their brokerage accounts or retirement accounts before the inflation-causing bear market may have money to work with after a big stock market decline.
This is Warren Buffett’s favorite way to make money. What most people don’t understand is that while Buffett’s primary strategy is to buy great companies at good value, his main skill is patience and collecting cash in bull markets that are overpriced. Buffett will collect cash from premiums from his insurance companies and hold it in anticipation of bear market opportunities. He wants to hold the stock forever as he buys the best companies at great prices relative to their future cash flows.
However, he doesn’t dollar average his stocks, he only buys them when he sees the best risk/reward ratio for the price versus the company’s future earnings potential. Warren will raise billions in cash while waiting to price the companies he wants. Warren Buffett is one of those rich people who will make money when the stocks he bought at great prices return to normal after the bear market ends, when inflation comes back under control.
Understand that the Federal Reserve cannot allow inflation to remain high in the US for long because that violates their mandate. The Fed has no choice but to take the necessary steps through monetary policy to moderate inflation. So betting on long-term inflation in the US is betting against the Federal Reserve.
The wealthy can benefit more from inflation-induced market crashes because they tend to have more excess capital to put to work buying in a bear market, whether from cash flow or higher incomes. The working class has no capital to put to work and the middle class just tends to invest and hold and buy more with their 401 kilos of fixed salary cash flows.
Whether it is a rich person or a rich nation, debtors benefit greatly from inflation because the nominal dollar needed to pay off existing debt is reduced and the real dollar value of the debt is reduced. Debt appears as an asset on the balance sheets of bondholders, businesses and countries that have acquired debt. Debt appears as a liability on the balance sheets of bondholders, businesses and countries that sold the debt.
Your mortgage is an asset to your bank. If the bank holding your mortgage goes bankrupt, your mortgage is not wiped out, it is sold as an asset to another bank. Debt has an intrinsic value based on many variables.
Debt interest is what debtors pay for their liability when interest rates are higher than their original interest rates, a benefit to debtors. High inflation lowers the value of debt because the currency lent originally had a higher purchasing power than the currency currently has. When the debt is repaid in less currency than it was when the debt was issued, it is a benefit to the debtor. The rich like to use debt at cheap interest rates to leverage asset ownership. In times of inflation, this benefits the rich because they can repay the old low-interest debt in the new, lower-valued currency.
Any type of currency depreciation caused by monetary policy, whether gradual like 2% annual inflation or high inflation like 8% annual, benefits owners of physical assets and hurts the purchasing power of wage earners. The rich make money by owning things that go up in price with inflation. The working class suffers from inflation because it destroys the purchasing power of their only money, their wages.