Wednesday, January 18, 2023

Ten Upsides of Inflation

The year 2022 was chock full of news about inflation, with a year-to year Consumer Price Index increase of 9.1% in June and a still-high 6.5% CPI at year-end. Not surprisingly, much of the news was negative; e.g., soaring prices for food, gas, utilities, cars, insurance, and more. What often gets lost in conversations and media reports about inflation are the ways that some people can benefit from it.

Below is a brief description of 10 inflation upsides:

COLAs- Anyone who receives an inflation-based COLA (cost of living adjustment) in their income benefits from inflation. This includes Social Security recipients, retirees with COLA-adjusted pensions, and workers with COLAs stipulated in their job or union contracts.


Inflation-Adjusted Bonds- This includes Treasury Inflation-Protected Securities (TIPS) and Series I bonds, both of which are designed to protect fixed-income investors against inflation. Through April 30, the return on Series I bonds is 6.89%.


Higher Wages- Many workers receive an income bump during inflationary periods. This pay increase may or may not cover all of their increased expenses, but it is better than no increase.


Increased Savings Contribution Limits- Maximum limits for employer retirement plans (e.g., 401(k)s) and IRAs are pegged to inflation. When inflation rises, workers can save more money.


Marginal Tax Brackets- Income ranges in the seven marginal tax brackets ranging from 10% to 37% are inflation-based. When bracket incomes rise, people may be taxed at lower tax rates.


Standard Deduction- The amount of income taxpayers can shelter from income taxes rises with inflation (e.g., for couples filing jointly, the standard deduction is $27,700 in 2023 vs. $25,900 in 2022).


Estate Tax Exemption- The amount of assets taxpayers can shelter from estate taxes rises with inflation (e.g., $12.92 million per individual in 2023 vs. $12.06 million in 2022).


Higher Bank Account Interest- Yields on bank accounts rose in 2022 along with interest rate hikes made to quell inflation. In January 2023, many online bank accounts are paying 3.30%+.


Impacts on Debtors- Debtors with fixed rate loans are untouched by interest rate hikes and can repay lenders with “cheaper dollars” (money worth less than when it was originally borrowed).


Investment Impacts- Certain investments often do well during an inflation surge as hedges. They include short-term bonds and bond funds, brokered CDs, real estate, and commodities. However, only make investments that you fully understand and are within your risk tolerance.

In summary, there are both winners and losers affected by inflation. Many people fall into both camps. Be sure to take advantage of as many positive aspects of inflation that you can. 

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

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