5 Ways Inflation Could Make You Richer in the Long Run

There is no way around it: Inflation can be a big negative for your finances.

Rising prices can eviscerate the value of your money. Currently, inflation is running at 8.5%, and if it keeps up at that clip, a dollar’s purchasing power will be cut in half in just 8½ years.

So most of us would likely be better off in a world without inflation. However, that doesn’t mean there isn’t a silver lining to rising prices.

The U.S. Federal Reserve has been steadily hiking its target federal funds rate to try to bring inflation under control. And while rising rates hurt our pocketbooks in some ways, they can help in others.

Following are some ways that inflation can actually make you a bit richer over the long haul.

1. Some debts become easier to manage

The Fed’s campaign to raise rates can hurt people who hold specific types of debt. For example, if you carry credit card debt from month to month, you likely will pay more as your lender raises your credit card interest rate to match the Fed’s rate hikes.

But inflation actually can be a positive for those with other obligations, particularly debts attached to fixed interest rates, like a fixed-rate mortgage.

That probably sounds crazy. But it makes sense. Because inflation causes the dollar to decrease in value, the money you borrowed is now worth less than it was when you originally borrowed it.

Morris Pearl, former managing director at BlackRock, further explains how inflation can help debtors in a column he wrote for Fortune:

“If you are paying a mortgage or have any other large form of debt, like a student loan, inflation is good for you. Your mortgage payment does not change at all, but the house goes up in value, and you get all of the benefit, even though you only paid the down payment on the house. Your income goes up typically a tiny bit more than inflation, but a major part of your expenses do not go up, leaving you with more money to either save or spend.”

2. You earn more on savings accounts and CDs

When the Federal Reserve first started raising the federal funds rate, many experts predicted that bank savings rates would remain low. The argument was that banks were sitting on a glut of money and had little need to raise rates in order to attract depositors’ cash.

But here’s a little secret: Human beings — including those with fancy titles and doctorate degrees — are simply awful at predicting the future.

As it turns out, savings rates now are rising quickly. In fact, some are forecasting that rates on high-yield savings accounts could reach levels not seen for more than a decade.

Of course, higher rates on savings accounts don’t help much if inflation outruns those bigger returns. But rates on longer-term CDs also are increasing, and savers might benefit if they lock into a higher-rate CD over five or 10 years and the Fed quickly accomplishes its goal of tamping down inflation.

Stop by the Money Talks News Solutions Center and search for better rates on savings accounts and CDs.

3. You might be able to contribute more to your 401(k) or IRA

American asset-management firm Mercer is projecting that this year’s red-hot inflation will translate into higher contribution limits on 401(k), 403(b) and 457 plans in 2023.

Each year, the IRS decides whether to increase the maximum annual contribution limit on retirement savings vehicles, such as 401(k) plans and IRAs. By law, the limits must be adjusted annually to account for cost-of-living increases.

Mercer thinks the 2023 limit on 401(k) plans and similar accounts will jump by $2,000 next year, allowing workers to deposit up to $22,500.

This would be a boon to all people saving for retirement. For example, if Mercer’s projections come to fruition, those who are 50 or older will be able to contribute $30,000 to their workplace retirement plan — including a projected $7,500 “catch-up” contribution — in 2023.

And even if inflation subsides over time — as we all hope — those higher contribution limits are likely to remain in place for good.

4. You will be able to contribute more to your HSA

While we can only speculate about how much more we’ll be able to tuck into our retirement savings accounts next year, we already know that the health savings account contribution maximum will get a boost.

In 2023, individuals with qualifying health insurance plans will be able to contribute $3,850 to an HSA. For family coverage, the limit will be $7,750.

Those maximums are about 5.5% higher than they were in 2022. By contrast, contribution limits only increased 1.4% between 2021 and this year.

For more about why health savings accounts are a great place to stash your money, check out “3 Ways a Health Savings Account Can Improve Your Finances.”

5. You earn more on I bonds

Psst! Did you know you can earn 9.62% on your savings virtually risk-free?

That is the current composite rate on the federal government’s Series I savings bonds. These bonds are intended to help protect your savings from the ravages of inflation.

Each year, the government sets new inflation-adjusted rates for I bonds at the start of May and again at the beginning of November. So on Nov. 1, the inflation-based rate will reset for another six months.

Today’s sky-high rate may go higher or lower in November, depending on how inflation shakes out between now and then.

Before you purchase I bonds, make sure you understand the pros and cons of doing so. Money Talks News founder Stacy Johnson runs them down in “7 Things You Should Know Before Investing in I Bonds.”