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Mortgage debt reduction

Stubbornly high inflation in the U.S. can be a nightmare if you’re trying to get your first foothold on the housing ladder — but it’s not so bad if you already have a leg up.

As Grantham noted, inflation can help borrowers because it reduces the real inflation-adjusted value of your mortgage.

When you have a fixed-rate mortgage, your monthly payment stays the same over the life of your loan. The most common terms for fixed-rate mortgages are 15 and 30 years, and the interest rate is locked in for the duration no matter what happens in the economy.

With inflation, the value of your outstanding mortgage is reduced. That’s because mortgage debt is expressed in nominal terms (not adjusted for inflation). So if you have a mortgage and 10% annualized inflation, your mortgage would fall in value by the corresponding amount.

That could be considered a win for mortgage borrowers — but of course, there’s a catch.

The Federal Reserve has raised interest rates 11 times since March 2022, from 0.25% to 5.5%, to combat the nation’s rampant inflation. This has made it far more expensive to borrow money.

Connected to that, the average 30-year fixed mortgage rate has risen above 7.5% — levels not seen since at least 2000.

If you have outstanding credit card debt, personal loans or your mortgage is up for renewal any time soon, any benefits of inflation on your historical debt could easily be offset by higher interest rates.

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Other ways inflation is a help, not a hindrance

If you own investments that typically appreciate during periods of inflation — such as real estate and alternative assets including fine art, wine or even collectibles — you could see your net worth grow, especially if your investments outpace the rate of inflation.

In terms of investing, you could also benefit from higher contribution limits, thresholds and phase outs in retirement accounts such as 401(k)s and individual retirement accounts (IRAs). If you’re able to stash away more money into these tax-advantaged retirement accounts, you could benefit in the long run — especially if those dollars stretch further when you do eventually retire.

Another potential benefit of inflation is that many employers increase the wages of their employees to help them maintain their purchasing power. In August 2023, wages grew by 5.3%, according to Statista, while inflation amounted to 3.7%. When your salary goes up quicker than the cost of living, you could experience improved living standards.

But remember, wages are still in a correction after falling far behind inflation in 2022. In June last year, the monthly inflation rate for the U.S. hit a 40-year high of 9.1%, while wage growth only reached 6.7% last summer, according to Statista. This left many Americans in a tight financial bind that they’ve yet to recover from, despite wage growth currently outpacing inflation.

Grantham addressed this with Bloomberg’s Somerset Webb, stating: “People’s confidence in the economy is very low in the U.K. and the U.S. If you ask them: ‘Do you feel better off than last year?’ Almost nobody says they feel better off, even though obviously quite a large fraction are better off in real life. The results are: the rich and the poor are feeling a little squeezed in today’s environment.”

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Bethan Moorcraft is a reporter for Moneywise with experience in news editing and business reporting across international markets.

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