Could inflation be good for you? Or hit you harder than others?

Is there any silver lining when it comes to inflation? For some people, maybe there is. Let’s have a look at who will benefit and who will get squeezed…

We have been trained to think of inflation as unremittingly awful. It’s suddenly hit 7.1% in the UAE after several months of seeming immune. It reminds me of the region ‘decoupling’ from the financial crisis for a few months in 2008…

Meanwhile, Citibank is forecasting the UK could hit 18% inflation next year due to rising energy bills. Ouch.

It’s worth a quick reminder of what this means. You take the prices of various household products and services a year ago: a bottle of milk, a pair of trainers, a second-hand car, electricity bills. How much more expensive are they now? That percentage difference is inflation.

Hitting 7.1% in July is in comparison to July 2021, not June 2022 – fortunately.

So if someone gave you $1000 to buy things with in July 2021, the equivalent would be someone giving you $933.71 today to buy the same things, as they’ve all become more expensive. If you had kept that $1000 tucked away in your current account for a year, you can see how inflation erodes your buying power.

It’s not all bad news though.

Good for: skilled workers

If you are talented, then the increase in the cost of living gives you an excuse (if you needed one) to ask for a pay rise. If your employer refuses, there is probably another decent job out there for you.

One way high inflation rates become entrenched over time is from big pay rises boosting demand for goods and services, which increase in cost, leading to a demand for pay rises and continued expectations of high inflation.

People’s expectations of future inflation seem to be a big driver of actual inflation, which is why central banks are so keen to show they’re getting inflation under control.

So your pay rise isn’t going to help the world recover from inflation, but if you feel you are underpaid and undervalued, now is the time to do something about it.

Good for: people with mortgages

Let’s say you buy a flat for $200,000 with a mortgage for $100,000, with inflation at 5% per year. Property prices generally keep up with inflation over time, unless super-high inflation crashes the economy (which could still happen).

So if your other assets and your salary keep up with inflation, your mortgage has become smaller relative to them. If your mortgage was 4x your salary of $25,000, now it’s 3.8x your salary of $26,250, and that’s without even paying any of the balance off.

This may not play out over a year, especially if you don’t get that pay rise, but you can see how it works over several years or the entire length of your mortgage.

The people who will benefit most are those with a fixed-rate, interest-only loan. Being interest-only, the full balance will remain for many years to be eroded by inflation (though having to pay interest on the full balance all those years counters this).

A fixed-rate loan will protect you from interest rate rises, which usually follow an uncomfortable increase in inflation. By making it more expensive to borrow money, and more enticing to save money rather than spend it, the central bank increases interest rates hoping to bring inflation back down.

If you have a variable (or floating) rate loan, or your fixed-rate period is ending soon, please please rush to get a new fixed rate before they go up even further.

Good for: landlords

Inflation is pushing up the value of your property, eroding your mortgage and… you can increase the rent in line with inflation. You don’t have to, of course, but inflation and the general increases in rent all around you make it reasonable to do so.

Many landlords seem to be completely unreasonable and are making up excuses to kick tenants out so they can jack up the rent, but that’s another story.

Bad for: renters

You don’t have a property that can increase in value, and that increase will make it more expensive to get one. Meanwhile your rent is going up.

BUT that doesn’t mean you should rush to buy a property right now. There is nothing wrong with renting if you’re not ready to make a 7-10 year commitment. High inflation can also cause recessions and property crashes when high interest rates stop people wanting to buy.