Monday, 21 June 2021 -
Even as the Federal Reserve acknowledged Wednesday the post-pandemic booming economy, several borrowers can consider themselves lucky in the face of the creeping inflation.
Car prices, beef, and airplane tickets are hiking at an astonishing pace, and economics and consumers alike are predicting the start of an inflationary period. And while sceptics are suggesting the price hikes as a temporary blip stemming from the pandemic-induced mismatch and disruption of supply and demand, signs are strife that inflation could be creeping in. But why so?
The Continuous Price Upticks
Month after month, prices have continued to soar for a broader variety of goods and services. And while this is just the beginning, particular groups of the demographic are primed to benefit more if such price upticks continue. Such groups include local governments, businesses, corporations, and consumers that hold fixed-rate debts.
According to Kent Smetters, who is the faculty director of the Penn Wharton Budget Model – an institution that monitors policy proposals and their impact on the economy – inflation in such circumstances could signal a massive wealth transfer from lenders to borrowers. Kent also says that inflation will have a massive impact on people with wealth (lenders) while borrowers will discount reliefs on goods and services they pay for.
How the Model Works
With inflation, consumer assets would soar while their liabilities would go down. This means that as prices rise, companies employ more workers to help in the manufacture more goods to take advantage of the hiking prices. Wage increases mean companies would charge more for their products, and the workers would subsequently seek higher pay.
The ensuing spiral effect means a unit of money would be less valuable than it was previously. And this means less interest to lenders because borrowers who are tied on fixed-rate loans prior to the inflationary period are only obligated to repay what they initially agreed upon. And according to Kent, the expected inflation creeps to the US economy post-pandemic is a blessing to such consumer loans.
And Who Is Expected to Benefit?
This kind of dynamic hasn’t been seen in the U.S economy since the 1970s. And the lucky groups are going to be repaying loans with less purchasing power than when they borrowed. Therefore, the luck group includes:
Consumer loans with fixed interest rates.
Federal Student loans (which have fixed interest rates for their lifetime). In context, a borrower would theoretically earn more because wages rise with inflation. However, the amount of money owed in student loans remains the same.
Private Student loans with fixed interest rates.
Fixed-rate mortgage loans.
The Bottom Line
The expected post-pandemic inflation isn’t entirely good news to the borrowers either. This is because anyone taking out a fixed interest rate loan now will probably repay more in interest that has inflation factored in it. Moreover, the economic volatility that comes with inflation might lead to borrowers facing risks of unemployment.
(Written and edited by: The Decision Maker Team)
