Inflation winners and losers

Inflation, even at today’s low levels, is having a major impact. What is important to comprehend is that inflation now is massively more detrimental than it was before the banking crisis. As we will see, it is currently acting like a conveyor belt, transferring wealth from one group in society to another. This section looks at the true impact of current inflation and examines who are the real winners and losers.

The effect of inflation past

Until recently, many regarded the effects of inflation as somewhat random and often fairly benign. For example a paper published in 1998 by the Institute of Economic Affairs concluded that the effect of inflation very much depended upon the ability of people to anticipate it and there being mechanisms available for them to mitigate it:

“Inflation actually levies a tax on those who failed to anticipate it – or who were in no position to protect themselves against it – and redistributes it to those who were smart enough – or lucky enough – to anticipate it and take appropriate action. There is no obvious correlation between those who gain (or lose) from inflation.”

It is true that there were systems that did help to mitigate inflation. For example, historically there had existed a small premium over inflation for depositing money in some form of long-term savings account, thereby ensuring most savings apart from cash were protected to a reasonable extent*. In addition, mechanisms existed for employees, pensioners and welfare claimants to ensure that their standard of living largely kept up with inflation. Therefore the spending power of the majority of the population appeared at first sight to be largely unaffected by inflation.

However, even this analysis was too simplistic. It missed out the fact that there were some clear winners with inflation, for example debtors who saw their repayments (both capital and interest) decline over time as inflation eroded their real cost. The key counterparty to them was cash-holders who saw the value of their money destroyed.

The process of transfer of wealth between creditors and debtors was quite complex. For one thing, the two parties involved in the debt contracts both actually gained from inflation. In entering into the debt, new money was created and this expanded the money supply. This ultimately ended up creating the inflation.

Not only did debtors then gain from lower real repayment costs, but the counterparty to the debt (the lender) usually received a premium over inflation for lending the money**. Moreover as time went by, those debts became less risky to lenders and thereby permitted them to lend more whilst maintaining their capital ratios. It was a clever arrangement for both lender and borrower.

The problem for society was that someone had to pay for the inflation and the gains of these two parties. Moreover it was someone completely different who suffered, someone who was a mere bystander in their speculative games. That someone was the people who either had cash, money in cheque accounts or savings money held at interest rates lower than inflation. The 80/20 rule applies here as it does in many aspects of life. The gains accrued to the 20 per cent richest (plus governments) and the losses were disproportionally borne by the remaining 80 per cent in society and the poor whose assets were primarily cash-based.

Debt inflation process

The above depicts what used to happen with inflation in the past in what I will call more normal times. Its impact now is much more far-reaching and damaging.

Inflation now: the new winners and losers

Everything has changed since the financial crisis of 2007/8. We now live in a very different world. The way that governments have been forced to deal not only with their own debts but also those of their citizens, companies and banks, is to impose financial repression. A key facet of this is keeping interest rates below the rate of inflation. This means that there is no longer the opportunity for savers to mitigate the impact of inflation. At the same time, many governments have been forced to make austerity cuts and so welfare and pensions are often now failing to keep up with the rising cost of living. Finally, employees’ wages have been allowed to lag behind inflation in many countries as the recession has weakened the hand of wage negotiators.

The chart below summarises the net winners and losers from inflation. Scenario A depicts the current situation that exists after the Great Recession. It contrasts it to Scenario B describing the impact of inflation in more normal times that have persisted over most of the last few centuries. By contrast, Scenario C shows what the impact would be in a near-zero inflation world where the so-called risk premium has been restored and there is a small positive return for cash savers.

Winners losers

The inflation conveyor belt

The current scenario of inflation is very harmful for the majority of the population. It is creating a massive transfer of wealth from anyone with cash and savings towards debtors. This includes the majority of the population who hold such money as part of their pension savings.

Inflation conveyor belt

Inflation is effectively the conveyor belt that is responsible for the transmission. It is necessary as the world has become over-indebted and, barring outright default on some of those debts, inflation is the only simple way to reduce the burden. Moreover, the mechanism is quite subtle such that the bulk of people are unaware of what is happening and how money disappears into the hands of beneficiaries.


*Although taxation may have resulted in a below inflation yield for many.

**Although tax might reduce this such that their final receipts are below inflation.

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