Inflation is at a forty-year high, and everyone is paying higher prices as inflation erodes the average person’s purchasing power. But who hurts the most from inflation?.
Here are the groups that hurt more during periods of high inflation:
Low-wage workers are impacted by high inflation since it takes more of their wages to cover gas, food, utilities, and more. They often cannot negotiate wage increases to offset rising inflation.
Workers in a contract with a fixed rate of pay cannot negotiate a higher wage to offset high inflation due to being in a contract. They also feel inflation is eroding their purchasing power.
For retirees, inflation decreases their retirement savings, and they cannot replenish savings since they no longer work.
When prices rise, the value of money decreases, and the value of saving declines. Interest rates do not increase when inflation increases; the opposite happens. When the Fed raises interest rates, interest rates on consumer savings accounts do not increase since banks need to pay more to borrow from the Fed. During periods of inflation, people who have saved throughout their lives may see their savings deplete faster since higher prices take more of their savings.
Those with low income or near poverty have their budgets stretched when inflation is high. Low-income people experience what economists call “inflation inequality” since they can not offset high prices by making more money.
When inflation is high, the Fed steps in to raise interest rates to curb spending and slow inflation. When interest rates increase, consumers spend less, and the demand for goods and products decreases. Unfortunately, debtors with variable interest rate notes, such as variable mortgage rates or credit cards, will pay more as their interest rate increases.
When inflation is high, consumer confidence decreases. Banks and companies also pull back from spending, reducing investing and business expansion. In some instances, there is less job availability and a leveling of wages during periods of inflation.
Inflation is a regular occurrence and is not always bad if it does not remain high for extended periods. Economists view a 2% inflation rate as comfortable and inflation above 5% as bad for the economy, so the Fed has indicated it will raise interest rates throughout the year. When interest rates increase, inflation decreases, helping everyone keep more of each dollar.
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