investing

Winners and losers if inflation skyrockets

Savers. In an economy where inflation is rising quickly, interest rates rarely keep up, causing savers' hard-earned dollars to lose some buying power, McBride says. He suggests one way CD savers can fight this trend.

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"Keep your maturities short, so you have the ability reinvest at higher rates as inflation works its way out," McBride says. "You don't want to be locked in long term at a low rate of return only to see inflation go racing past you."

Retirees. A high inflation rate often means wage increases, but that won't benefit those who are retired, McBride says -- their pot of retirement money already is set.

"Higher inflation erodes the value of the savings that you have," he says. "When inflation goes up, it tends to accelerate a lot faster than interest rates can keep up, so it erodes the buying power not only of your existing savings, but anybody who's relying on interest income or investment income, like retirees."

Investors in long-term bonds. In a high-inflation environment, "it's on the bond side where there's a lot more trouble," Thoma says. "If you're living off coupon bond payments, for instance, you're going to lose when there's inflation."

McBride says bond investors can hedge against inflation by favoring shorter-term bonds and inflation-indexed bonds.

Variable-rate mortgage holders. Homeowners with mortgage rates that aren't fixed see their borrowing costs climb periodically along with the broader inflation in the economy, leading to larger payments and decreased affordability.

Credit card debt holders. Most credit cards have a variable interest rate tied to a major index such as the prime rate. Because of this, credit card holders experience quickly climbing rates and higher payments in an inflationary environment.

Consumers. Consumers feel the crunch right away from dramatically higher inflation, Lowenberg says.

"For the average person who's on a set salary, it would start pricing things -- normal, usual things -- out of their reach," she says.

First-time homebuyers. The first-time homebuyer bonanza going on today wouldn't last long in a high-inflation environment.

McBride says people looking to save for their first home in the midst of a high inflation rate are confronted with quickly rising home prices, high interest rates for mortgages and a relentless slide in the value of any money they've put away for a down payment.

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