The winners in the era of inflation: Who benefits from rising prices?

In recent years, global inflationary pressures have persisted, with prices in Taiwan soaring rapidly. The central bank has raised interest rates multiple times to curb inflation. But have you ever wondered who truly benefits from this wave of inflation? This article will delve into the nature of inflation, its impacts, and the investment opportunities behind it.

What is Inflation? Why Does It Occur Frequently?

Inflation, abbreviated as “inflation,” refers to a sustained increase in prices over a period, leading to a decline in the purchasing power of money. The most common indicator used to measure inflation is the Consumer Price Index (CPI).

The fundamental cause of inflation is that the amount of money circulating in the economy exceeds the supply of actual goods. In summary, there are four main factors that trigger inflation:

Demand-pull inflation refers to price increases caused by rising demand. When demand for goods is strong, companies increase production, and prices rise accordingly, boosting corporate profits. Although this type of inflation pushes prices up, it also promotes GDP growth, so governments are generally pleased to see this moderate inflation.

Cost-push inflation originates from rising raw material prices. During the Russia-Ukraine conflict in 2022, Europe’s energy supply was disrupted, causing oil and gas prices to surge tenfold. The CPI year-over-year increase in the Eurozone exceeded 10%, reaching a record high. This type of inflation leads to a decline in social output and is the least desirable outcome for governments.

Excess money supply often results in hyperinflation. Historically, Taiwan in the 1950s issued large amounts of currency to address post-war deficits, leading to 8 million legal tender notes being worth only 1 US dollar.

Rising inflation expectations are equally harmful. Once the public anticipates continued price increases, consumption rises, wages demand higher pay, and businesses raise prices accordingly, creating a self-fulfilling inflation cycle that is difficult to break.

How Do Rate Hikes Suppress Inflation? What Are the Costs?

When the central bank raises interest rates, borrowing costs increase. For example, if a loan interest rate rises from 1% to 5%, borrowing 1 million increases from paying 10,000 in interest annually to 50,000. As a result, people are more inclined to save rather than borrow and spend. Reduced demand leads to lower prices for goods, thus curbing inflation.

However, the cost of raising rates is severe. Companies may lay off workers due to decreased demand, leading to higher unemployment, slower economic growth, or even recession. In 2022, US inflation hit a 40-year high (CPI rose 9.1% YoY in June). The Federal Reserve responded with seven rate hikes totaling 425 basis points, pushing rates from 0.25% to 4.5%. The result was the worst performance in US stocks in 14 years, with the S&P 500 dropping 19% and the Nasdaq plunging 33%.

Why Are Economists Optimistic About Moderate Inflation?

Seemingly frightening inflation actually has positive implications. Moderate inflation can encourage consumption and investment. When people expect prices to rise in the future, they increase current purchases, boosting demand. This prompts companies to invest further in expanding production, leading to economic growth.

For example, in China, CPI rose from 0 to 5% in the early 2000s, while GDP growth accelerated from 8% to over 10%. Conversely, when inflation rates fall below 0 (deflation), people tend to hoard cash, and consumption collapses. Japan experienced deflation after the 1990s bubble burst, with negative GDP growth, leading to the so-called “Lost Decade” and beyond.

Therefore, most central banks worldwide set their inflation targets around 2%-3% (most countries aim for 2%-5%), balancing economic stimulation with control.

Who Are the True Beneficiaries of Inflation?

The biggest beneficiaries during inflationary periods are those with debt. While cash holdings depreciate, the real value of debts owed also diminishes. For example, borrowing 1 million at 3% inflation 20 years ago to buy a house now effectively only costs about 550,000 in real terms, meaning you only need to repay half the original amount.

Thus, during high inflation, those who purchase assets (real estate, stocks, gold) with borrowed money benefit the most. This explains why real estate often performs remarkably well during inflation—ample liquidity floods into assets that preserve value, causing property prices to appreciate.

Besides debtors, energy-related listed companies are also beneficiaries of inflation. In 2022, the US energy sector returned over 60%, with Western Oil up 111% and ExxonMobil up 74%. This is because rising energy prices directly boost corporate profits, and energy demand remains relatively inelastic, not easily declining even during economic slowdown.

Investment Strategies During Inflation

In a high-inflation environment, relying on a single asset class is risky. Savvy investors should build diversified portfolios.

Assets that perform relatively well during inflation include:

Real estate tends to appreciate continuously during inflation, as abundant liquidity favors assets that preserve value.

Precious metals (gold, silver) tend to move inversely to real interest rates. Real interest rate = Nominal interest rate – Inflation rate. The higher the inflation, the lower or even negative the real interest rate, making gold a preferred safe-haven asset.

Stocks may show short-term divergence, but over the long term, most stocks can outperform inflation. Cyclical sectors like energy and materials tend to perform especially well during high inflation periods.

A strong foreign currency like the US dollar often appreciates during inflation. When the Fed adopts a hawkish rate hike policy, the dollar becomes more attractive relative to other currencies, strengthening its purchasing power.

A balanced allocation could be: 33% stocks for growth potential, 33% gold for preservation, and 33% US dollars for inflation hedging. This diversified mix can spread risk and generate steady returns across different economic conditions.

Stock Market Performance in Different Inflation Environments

During low inflation periods, market capital flows into stocks, pushing prices higher. However, during high inflation, tightening policies by central banks tend to pressure stock prices, as seen in 2022’s global markets.

Not all stocks perform poorly during inflation. Energy companies, due to rising oil and gas prices, saw profits surge and became standout sectors. Conversely, growth tech stocks faced pressure from rising financing costs, leading to valuation declines.

This suggests investors should dynamically adjust their holdings based on macroeconomic conditions rather than passively endure market volatility.

Conclusion

Inflation is not necessarily a disaster; understanding its internal logic and mechanisms is key. Moderate inflation can promote economic growth, but excessive inflation triggers tightening policies that harm the economy. During inflationary times, the true beneficiaries are those holding assets, leveraging debt, and companies capable of passing costs onto consumers.

Ordinary investors should build diversified portfolios across stocks, gold, US dollars, and real estate to spread risk, participate in economic growth, and hedge against inflation. Only then can you find your investment opportunities amid the inflation wave.