Yahoo Finance Investing expert Jeremy Grantham explains there are benefits to inflation that have 'slipped through unnoticed' — do any apply to you?
Inflation is starting to feel like a dull ache that just won’t go away no matter what the Federal Reserve throws at it.
Americans are feeling the sting in their wallets as they try to navigate high prices of goods and services, as well as painfully high interest rates — but “there is an offset,” according to Jeremy Grantham, co-founder and chief investment strategist at Boston-based GMO LLC.
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“It does take down debt,” he told Merryn Somerset Webb on a recent episode Bloomberg’s “Merryn Talks Money” podcast.
“If you have a very big mortgage and you have 10% inflation, you owe 10% less — and that sadly has always slipped through unnoticed.”
It’s not just borrowers of fixed-rate loans, such as mortgages, who can potentially reap some benefits from inflation. There are several silver linings — some shinier than others — that you may be able to take advantage of.
Mortgage debt reduction
Stubbornly high inflation in the U.S. can be a nightmare if you’re trying to get your first foothold on the housing ladder — but it’s not so bad if you already have a leg up.
As Grantham noted, inflation can help borrowers because it reduces the real inflation-adjusted value of your mortgage.
When you have a fixed-rate mortgage, your monthly payment stays the same over the life of your loan. The most common terms for fixed-rate mortgages are 15 and 30 years, and the interest rate is locked in for the duration no matter what happens in the economy.
With inflation, the value of your outstanding mortgage is reduced. That’s because mortgage debt is expressed in nominal terms (not adjusted for inflation). So if you have a mortgage and 10% annualized inflation, your mortgage would fall in value by the corresponding amount.
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That could be considered a win for mortgage borrowers — but of course, there’s a catch.
The Federal Reserve has raised interest rates 11 times since March 2022, from 0.25% to 5.5%, to combat the nation’s rampant inflation. This has made it far more expensive to borrow money.
Additionally, the average 30-year fixed mortgage rate has been steadily above the 7% mark recently.
If you have outstanding credit card debt, personal loans or your mortgage is up for renewal any time soon, any benefits of inflation on your historical debt could easily be offset by higher interest rates.
Other ways inflation is a help, not a hindrance
If you own investments that typically appreciate during periods of inflation — such as real estate and alternative assets including fine art, wine or even collectibles — you could see your net worth grow, especially if your investments outpace the rate of inflation.
In terms of investing, you could also benefit from higher contribution limits, thresholds and phase outs in retirement accounts such as 401(k)s and individual retirement accounts (IRAs). If you’re able to stash away more money into these tax-advantaged retirement accounts, you could benefit in the long run — especially if those dollars stretch further when you do eventually retire.
Another potential benefit of inflation is that many employers increase the wages of their employees to help them maintain their purchasing power. In August 2023, wages grew by 5.3%, according to Statista, while inflation amounted to 3.7%. When your salary goes up quicker than the cost of living, you could experience improved living standards.
But remember, wages are still in a correction after falling far behind inflation in 2022. In June last year, the monthly inflation rate for the U.S. hit a 40-year high of 9.1%, while wage growth only reached 6.7% last summer, according to Statista. This left many Americans in a tight financial bind that they’ve yet to recover from, despite wage growth currently outpacing inflation.
Grantham addressed this with Bloomberg’s Somerset Webb, stating: “People’s confidence in the economy is very low in the U.K. and the U.S. If you ask them: ‘Do you feel better off than last year?’ Almost nobody says they feel better off, even though obviously quite a large fraction are better off in real life. The results are: the rich and the poor are feeling a little squeezed in today’s environment.”
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
