5 Surprising Ways Inflation Affects the Ultra-Wealthy
Written by
Jordan Rosenfeld
Edited by
Molly Sullivan
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Inflation is the unpleasant, yet inevitable force where every year you pay a little more money for the same goods and services. While the economy can typically absorb an average of 2% inflation every year, when inflation rises above that, people feel the pinch.
It’s understandable that everyone from lower-income to middle-income folks feel the impacts of inflation, but what about the ultra-wealthy? Does it affect them too?
It does, though differently than the rest of Americans. Here are the surprising ways inflation affects even those with the most money.
It Reduces the Values of Their Investments
When inflation spikes, people who owe fixed debts — loans with payments that don’t change when prices rise, like a 30-year fixed-rate mortgage or a car loan — tend to do better, financially. Meanwhile, people who hold fixed claims — assets that promise a set number of dollars, like most bonds, CDs and fixed annuities, or money someone owes you — tend to lose, according to Stanford’s Institute for Economic Policy Research. Another way to look at this is: You lend a friend $100 at 5% interest, so they owe you $105 next year. If inflation is 0%, that $105 buys about 5% more than the $100 you lent. If inflation is 10%, the $105 buys less than the original $100 did, so your friend repays you with cheaper dollars. The borrower gains, the lender loses.
At the household level, that usually means older wealthy families who hold lots of bonds and cash lose when inflation is high, while many younger middle-class families gain because inflation shrinks their fixed-rate mortgage debt. In other words, inflation can act like a transfer from wealth holders to borrowers.
It Erodes Cash and Bonds
High inflation is bad news for most portfolios, but especially bad for the top 1% who hold around half of all U.S. corporate equities and mutual funds. Bonds pay fixed dollars, so when inflation rises, those dollars buy less and returns diminish. Stocks can struggle too because rising prices often push interest rates higher which threatens valuations and profits. History shows that during high or surprise inflation both stocks and bonds have weaker after-inflation returns.
The ultra-wealthy don’t carry much household debt, so inflation doesn’t shrink their loan balances, but it does reduce the purchasing power of their cash and bonds because those dollars buy less.
It Impacts How Real Estate Prices Look
Another area where the ultra-wealthy feel the impacts of inflation is in real estate, according to Jim Dahle, The White Coat Investor.
If a $500,000 home is “worth” $525,000 a year later because inflation was 5%, you’re not truly richer in real terms — you can buy roughly the same amount of “stuff” as before. The nominal price rose, but purchasing power didn’t.
It Can Hurt Investments in General
Dahle pointed out that inflation is “the greatest enemy of the investor.” While stocks, TIPS (Treasury inflation-protected securities), commodities, precious metals and cryptocurrencies can hold steady under inflation, bank accounts, CDs and bonds don’t do as well. In truth you need a variety of investment types in your portfolio to weather inflation, and the wealthy have more money invested, thus they also have more to lose. And in general, inflationary periods overall are correlated with lower performance on stocks and bonds.
It Impacts Their General Investing Decisions
Inflationary environments can also affect the way wealthy investors make decisions. They might not leave money in the bank where it can be loaned out. They might purchase “hard assets” they wouldn’t otherwise buy. They invest differently and might even work or choose jobs differently. “It has all kinds of economic effects, and the overall effect is definitely negative,” Dahle said.
The bottom line is that inflation chips away at the net worth of the ultra-wealthy, but the good news is that it can often benefit middle-class borrowers.
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