Is Inflation Good or Bad for You?

Author: Sol Nasisi on October 10, 2007

There's been a bit of talk about inflation lately and how it might be rearing its ugly head.  The conventional wisdom says that inflation is very bad.  It makes everything we buy more expensive and decreases the value of our currency.  But there are times when inflation is good for you.

For example, if you purchase a home with a fixed rate mortgage, inflation will decrease the size of your payments in relative terms.  Say you are paying $1,000 per month towards your mortgage.  Now let's say that inflation increases at 5% per year.  That means your mortgage payment shinks by 5% per year as your salary adjusts to inflation.  That's why when you ask someone how much their payments were 40 years ago it seems like peanuts.  Without inflation, that $1,000 per month would seem like $1,000 per month.

A little inflation might actually help sub-prime borrowers by making the payments a bit more manageable.

Generally, if you have a lot of debt, inflation works for you by decreasing the relative size of that debt.  If you have a lot of assets, inflation works in the opposite by decreasing the value of those assets.  $1,000,000 50 years ago is not the same as $1,000,000 today because of inflation.

 

 

Sol Nasisi
Sol Nasisi: Sol Nasisi is the co-founder and a past president of BestCashCow, an online resource for comprehensive bank rate information. In this capacity, he closely followed rate trends for all savings-related and loan products and the impact of rate fluctuations on the economy. He specifically focused on how rates impact consumers' ability to borrow and save. He also has authored a wee

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