High inflation harms older households — and two factors determine who is most at risk, research finds (2024)

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High inflation harms older households — and two factors determine who is most at risk, research finds? ›

Two factors determine how well they can manage inflation's shocks — whether their income and investments can keep pace with rising prices, and the amount of fixed-rate debt they have, the research found.

Such inflations lead to welfare losses, which are largest for younger, less-educated households and for retirement-age college-educated households. Meanwhile, young and middle-aged college-educated households actually benefit from the inflationary oil shock.

High inflation generally harms older households, but the impact varies by retirement status and wealth. Retirees are hurt more than near retirees because, outside of Social Security, their income is less indexed to prices and they hold less fixed-rate debt.

Higher food, gasoline, and utility costs mean less money for savings and less for discretionary spending. To compensate, consumers buy less, switch to cheaper substitutes, look harder for bargains, or put off major purchases.

Key takeaways

Lenders are hurt by unanticipated inflation because the money they get paid back has less purchasing power than the money they loaned out. Borrowers benefit from unanticipated inflation because the money they pay back is worth less than the money they borrowed.

Since inflation reduces purchasing power, consumers represent the primary group who stand to lose when prices rise. That's because their money doesn't go nearly as far and allows them a limited number of goods and services they can purchase.

Gen Z members (born between 1997 and 2012) have been hit harder by inflation than all other age groups, and the effects could cast a shadow over their financial health for years to come, according to studies by Moody's Analytics and TransUnion, the credit reporting agency.

So, why are retired people hurt by inflation? “Retirees don't necessarily have income, meaning they need to make that lump sum last as long as possible, and high inflation erodes those savings,” Benson says.

But our research found a strong link between trend inflation—the average rate at which prices increase over a several-year period—and the age structure of the population. Specifically, we found that the larger the proportion of young and old in the total population, the higher inflation.

Who benefits from inflation? ›

Inflation allows borrowers to pay lenders back with money worth less than when it was originally borrowed, which benefits borrowers. When inflation causes higher prices, the demand for credit increases, raising interest rates, which benefits lenders.

Typically, the Federal Reserve attempts to reduce inflation by raising interest rates. That means that rising inflation usually leads to mortgage rates increasing. Higher mortgage rates, in turn, increase the monthly housing cost for people who borrow money to buy homes.

Real wages are represented by the amount of goods and services we can buy with that money. When inflation increases the prices of goods and services but the nominal wage stays the same, people can buy fewer things with the same amount of money. Therefore, people have less purchasing power and their money is worth less.

Inflation is also bad for consumers tied to fixed economic items. One example is workers who are in fixed-term temporary contracts that do not allow for wage increases. Another example is investors dedicated to fixed-income securities.

Low-income households most stressed by inflation

When prices rise, middle-income households may react by consuming cheaper goods and buying more generic brands. Low-income households do not have the same flexibility; in many cases, they are already consuming the cheapest products.

The real value of debt decreases when inflation is high. Think of it this way: While wages don't always keep up with inflation when prices are rising rapidly, they do tend to increase during these periods, and that can make it easier to cover the payments on a fixed-rate loan product such as a mortgage or student loan.

In fact, the upper middle class and the top 1% of Americans have actually benefited from high inflationary periods, increasing their wealth, while lower-wage families have been negatively impacted, according to a working paper by economist Edward Nathan Wolff for the National Bureau of Economic Research.

The middle class typically benefits from inflation because the middle class typically has a lot of debt. Think of someone who owes $100,000 on a $200,000 home. Inflation makes the home more valuable and the debt relatively less onerous.