This week saw the Reserve Bank of Australia (RBA) increase interest rates due to stubbornly high inflation. Higher interest rates for the short-term are seen as a necessary medicine to ensure that inflation is not high in the long-term. So who would be affected the most if inflation was to remain high? The fact is that high inflation does not affect everyone equally. It acts like a regressive tax, hitting hardest those with the least flexibility to adjust their income, spending, or wealth. Below is a detailed, structured explanation of who is most affected by high inflation and why, moving from the most vulnerable groups outward.
Low-income households (the most affected group)
Low-income households are consistently the worst hit by high inflation.
Why they suffer most:
- A very large share of their income goes to essential goods—food, rent, electricity, fuel, and transport.
- These essentials often rise faster than average inflation.
- They have little or no savings to cushion price increases.
- Wages at the bottom of the income distribution are slow to adjust.
Consequences:
- Immediate decline in living standards
- Food insecurity and rent arrears
- Rising reliance on debt or government assistance
- Higher risk of homelessness and poverty
Inflation is felt daily and immediately in this group.
People on fixed incomes
This group includes retirees, pensioners, and people receiving disability or long-term social benefits.
Why they are vulnerable:
- Their income is fixed or adjusted only periodically.
- Cost-of-living adjustments often lag inflation.
- Healthcare, housing, and utilities—large parts of their spending—rise quickly during inflation.
Consequences:
- Rapid erosion of purchasing power
- Depletion of lifetime savings
- Increased elderly poverty and reduced quality of life
High inflation can undo decades of careful financial planning.
Renters
Renters are much more exposed to inflation than homeowners.
Why renters lose:
- Rents tend to rise quickly during inflationary periods.
- Rent is non-negotiable and unavoidable.
- Wage growth usually lags rent increases.
Consequences:
- Forced relocation to cheaper areas
- Overcrowding or reduced housing quality
- Difficulty saving for home ownership
- Long-term wealth inequality between renters and owners
Workers with weak bargaining power
This includes low-skill workers, gig workers, and casual workers.
Why they are affected:
- Limited ability to negotiate pay increases
- Job switching is risky during volatile economic conditions
- Employers may delay or cap wage growth during inflation
Consequences:
- Real wages fall
- Job insecurity increases
- Lost income is rarely recovered even after inflation subsides
Savers holding cash or low-yield assets
People who rely on traditional savings instruments are quietly hurt by inflation.
Why:
- Inflation reduces the real value of cash and bank deposits.
- Interest rates on safe assets often lag inflation.
- Fixed-rate bonds lose value in real terms.
Consequences:
- Erosion of lifetime savings
- Increased pressure to take financial risks
- Reduced trust in financial institutions
Small and medium-sized businesses
Smaller firms are more exposed than large corporations.
Why:
- Input costs rise unpredictably.
- Customers resist frequent price increases.
- Access to credit becomes more expensive as interest rates rise.
Consequences:
- Shrinking profit margins
- Business closures and layoffs
- Reduced competition and innovation
The broader impact: the middle class and social stability
While not always the first to collapse, the middle class suffers long-term damage:
- Savings lose value
- Housing becomes less affordable
- Upward mobility declines
Over time, high inflation erodes trust in money, contracts, and institutions, leading to political polarization and social unrest.
Lauren Hua is a private client adviser at Fairmont Equities.
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