Who is laughing in the era of inflation? Seize the opportunity of beneficiaries within the economic cycle

In recent years, rising prices have become the norm. Taiwan’s central bank has raised interest rates five consecutive times, and major economies around the world are also aggressively hiking rates. But did you know? During this inflation cycle, not everyone is losing money—some people are quietly getting richer.

What is inflation? Why does it matter?

Inflation simply means that money is losing its value. When an economy has too much circulating currency and supply of goods is relatively limited, prices will continue to rise, and your cash’s purchasing power will steadily decline. The most common indicator used to measure this phenomenon is the Consumer Price Index (CPI).

There are many causes of inflation. Increased demand can drive prices up, and rising raw material costs (for example, the 2022 Russia-Ukraine conflict caused European energy prices to surge tenfold, with the Eurozone CPI reaching a record high of over 10%) can also push prices higher. Excessive money printing by governments can lead to hyperinflation—Taiwan experienced this in the 1950s, when 800 million old Taiwan dollars were only worth 1 US dollar. Additionally, when people expect future prices to rise, they tend to spend in advance, further pushing up prices, creating a self-fulfilling cycle of inflation expectations.

Interest rate hikes are the most common tool used by central banks to combat inflation. When the central bank raises rates, borrowing costs increase, leading to reduced corporate and personal loans, tightening market liquidity, shrinking demand, and naturally causing prices to fall. For example, in 2022, the US inflation rate hit a 40-year high of 9.1% in June. The Federal Reserve responded with aggressive rate hikes, raising rates seven times for a total of 425 basis points, from 0.25% to 4.5%. However, the cost is higher unemployment and slower economic growth, sometimes even triggering recessions.

Hidden beneficiaries of inflation: Who is making money?

Most people panic when they hear about inflation, but in fact, moderate inflation (within 2%-5%) is beneficial to the economy. It can stimulate consumption expectations, encourage business investment, and drive GDP growth. China’s data in the early 2000s is proof—CPI rose from 0 to 5%, and GDP growth jumped from 8% to over 10%.

More importantly, there are clear groups that benefit from inflation:

1. People with debt

This is the biggest winner in inflation. Suppose you borrowed 1 million yuan to buy a house 20 years ago, with a fixed annual interest rate of 2%. Under a 3% inflation rate eroding the value, after 20 years, that 1 million yuan is only equivalent to 550,000 yuan in purchasing power. In other words, the debt you owe has effectively shrunk by half. The higher the inflation rate, the lighter the debt burden for borrowers.

2. Asset holders

Assets like real estate, stocks, and gold tend to rise in value with inflation. During periods of abundant liquidity, hot money flows into these assets, pushing up valuations. In the long run, stock returns often outperform inflation. Gold has an inverse relationship with real interest rates (nominal rate minus inflation rate); the higher the inflation, the better gold performs.

3. Energy company shareholders

High inflation is often accompanied by soaring energy prices. In 2022, the US energy sector returned over 60%, with Occidental Petroleum and ExxonMobil rising 111% and 74%, respectively. These companies saw significant profit growth, benefiting shareholders.

4. US dollar holders

During periods of high inflation, the Federal Reserve often adopts aggressive rate hikes, which tend to strengthen the US dollar relative to other currencies. A stronger dollar makes dollar-denominated assets more valuable.

The dual impact of inflation on the stock market

Conclusion first: low inflation benefits stocks, high inflation harms stocks.

In a moderate inflation environment, hot money flows into stocks, driving up prices. But when inflation surges, central banks’ tightening policies increase corporate financing costs, suppressing stock valuations.

The 2022 US stock market is a vivid lesson. The Fed’s aggressive rate hikes caused valuations to collapse— the S&P 500 declined by 19% for the year, and the tech-heavy Nasdaq fell 33%.

But this doesn’t mean that stocks can’t be bought during high inflation periods. Defensive sectors like energy, utilities, and consumer staples often show resilience. For example, Western Petroleum and ExxonMobil surged against the trend in 2022 precisely because their products—oil—became scarce commodities during high inflation.

How to build an inflation-resistant investment portfolio?

Knowing who benefits from inflation, investors need to take proactive steps. The key is diversified asset allocation:

Assets that perform well during inflation:

• Real estate: Inflation-driven liquidity often flows into property markets, pushing up prices
• Gold and silver: Negatively correlated with real interest rates; the more intense the inflation, the more attractive gold becomes
• Stocks: Short-term sector rotation is evident, but long-term returns usually beat inflation
• US dollar: During rate hike cycles, the dollar appreciates, hedging against inflation risk
• Energy stocks: Directly benefit from rising energy prices

Practical allocation example:

Divide your funds into three equal parts—33% in stocks (driving GDP growth), 33% in gold (a store of value), and 33% in US dollars (appreciation hedge). This combination can capture economic growth benefits while mitigating risks from any single asset class.

For investors seeking a one-stop multi-asset approach, Contracts for Difference (CFDs) are an option—offering a wide range of products including stocks, precious metals, and forex, with relatively low trading costs and higher leverage.

Final words

Inflation is not the end of the world; it’s just a phase in the economic cycle. The key is to identify who benefits from inflation—those with debt, asset holders, energy industry participants, or dollar assets. As investors, instead of passively suffering from inflation erosion, it’s better to actively seize asset allocation opportunities and grow wealth during inflation cycles. Remember: central banks typically target inflation in the 2%-5% range, meaning moderate inflation is a sign of healthy economic operation. Learning to find opportunities within it makes you a true investment master.