Inflation Doesn't Spare the Rich — 4 Ways It Hits Them, Too

Inflation is never pleasant. It's the quiet, inevitable force that makes you pay a little more every year for the same goods and services. We tend to think of it as a burden for everyday Americans — and it is — but inflation doesn't spare the ultra-wealthy either. While rising prices hit lower- and middle-income households hardest, high-net-worth individuals face their own, less obvious set of challenges.

From eroding the value of cash and bonds to upending long-held investment strategies, inflation quietly reshapes how the rich manage and grow their wealth. Some of the wealthiest families in the U.S. are already rethinking their portfolios, tax strategies and asset allocations to stay ahead of the volatility. The economy can typically shrug off around 2% inflation a year — but once it climbs higher, everyone feels the pinch, from the middle class to the mega-rich.

Here are four surprising ways inflation impacts the ultra-wealthy — and, more importantly, what it means for your money.

1. It Reduces the Value of Their Investments

When inflation spikes, people who owe fixed debts -- loans with payments that don't change when prices rise, like a 30-year fixed-rate mortgage or a car loan -- tend to do better financially. Meanwhile, people who hold fixed claims -- assets that promise a set number of dollars, like most bonds, CDs and fixed annuities, or money someone owes you -- tend to lose, according to Stanford's Institute for Economic Policy Research.

Here's another way to look at it: You lend a friend $100 at 5% interest, so they owe you $105 next year. If inflation is 0%, that $105 buys about 5% more than the $100 you lent. If inflation is 10%, the $105 buys less than the original $100 did, so your friend repays you with cheaper dollars. The borrower gains, the lender loses.

At the household level, that usually means older, wealthy families who hold lots of bonds and cash lose when inflation is high, while many younger middle-class families gain because inflation shrinks their fixed-rate mortgage debt. In other words, inflation can act like a transfer from wealth holders to borrowers.

Likewise, Jim Dahle of The White Coat Investor pointed out that inflation is "the greatest enemy of the investor." While stocks, TIPS (Treasury inflation-protected securities), commodities, precious metals and cryptocurrencies can hold steady under inflation, bank accounts, CDs and bonds don't do as well.

In truth, you need a variety of investment types in your portfolio to weather inflation, and the wealthy have more money invested -- thus they have more to lose. In general, inflationary periods overall are correlated with lower performance on stocks and bonds.

2. It Erodes Cash and Bonds

High inflation is bad news for most portfolios, but especially bad for the top 1% who hold around half of all U.S. corporate equities and mutual funds. Bonds pay fixed dollars, so when inflation rises, those dollars buy less and returns diminish. Stocks can struggle too because rising prices often push interest rates higher, which threatens valuations and profits.

History shows that during high or surprise inflation, both stocks and bonds have weaker after-inflation returns. The ultra-wealthy don't carry much household debt, so inflation doesn't shrink their loan balances, but it does reduce the purchasing power of their cash and bonds because those dollars buy less.

3. It Impacts How Real Estate Prices Look

Another area where the ultra-wealthy feel the effects of inflation is in real estate, said Dahle.

If a $500,000 home is "worth" $525,000 a year later because inflation was 5%, you're not truly richer in real terms -- you can buy roughly the same amount of "stuff" as before. The nominal price rose, but purchasing power didn't.

4. It Affects Their General Investing Decisions

Inflationary environments can also affect the way wealthy investors make decisions. They might not leave money in the bank where it can be loaned out. They might purchase "hard assets" they wouldn't otherwise buy. They invest differently and might even work or choose jobs differently.

"It has all kinds of economic effects, and the overall effect is definitely negative," Dahle said.

The bottom line is that inflation chips away at the net worth of the ultra-wealthy, but the good news is that it can often benefit middle-class borrowers.

Caitlyn Moorhead contributed to the reporting for this article.

This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.