How Inflation Affects the Rich and the Poor

How Inflation Affects the Rich and the Poor

While inflation is a real concern for all Americans, economists also recognize that it has several positive effects. For starters, a higher inflation rate means that the cost of common items will go up. When prices rise, more people will want to borrow credit to buy big-ticket items, thereby increasing the demand for credit. It is important to note that higher inflation will also lead to higher interest rates for borrowers. Therefore, inflation will be a good thing for lenders.

Purchasing Power

Inflation is the general increase in prices, which results in a fall in purchasing power (i.e., the value of a currency expressed in the quantity of goods and services it can buy). Several economists agree that the long-term effects of inflation depend on the money supply, which is directly related to prices. Increasing the money supply, or money in circulation, will increase prices proportionally. But increasing the money supply faster than real output will cause inflation.

High Income vs Low Income

Inflation matters less to the majority of Americans than it may seem. For example, higher-income households are less affected by rising prices, since they spend more on investments, mortgages, and retirement accounts than they do on essentials. Moreover, the inflation rate will be higher for people who earn less than $30,000.

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