Why inflation can actually be good for everyday Americans and bad for rich people

New York(CNN Business) No one likes paying more for stuff. That's why inflation, especially the sharp price increases we've seen in recent months, feels like a dirty word.

But on the whole, inflation can actually be a good thing for many working-class Americans, especially those with fixed-rate debt like a 30-year mortgage. That's because wages are going up, which not only empowers workers but also gives them more money to pay down debt. Plus, in the case of a mortgage, your monthly payment will be the same but your house will increase in value.

And many of the people taking a bath when prices rise are higher-net worth people who hold the vast majority of government bonds.

The trouble is, you're not going to feel the upside immediately.

"There is light at the end of the tunnel, it's just that it could be a couple of years," said Kent Smetters, professor of business economics at the Wharton School of Business.

How inflation favors debtors

The immediate benefits of inflation to everyday people are less tangible than the drawbacks — you feel the sting of your grocery bill and the gut-punch of filling up your gas tank. Less palpable but still significant is the dwindling burden of your debt.

"If you're borrowing at a fixed rate, like a 30-year mortgage, then you're a winner as inflation goes up," says Smetters. "We often think of a 30-year mortgage as an inflation hedge."

In other words, the cost of your mortgage is holding steady, while the amount of money you have to pay for it is going up. It's not a perfectly synchronized event, of course: Wages don't go up immediately with inflation, but eventually they do, Smetters said.

Mortgages, the vast majority of which are fixed-rate 30-year loans, make up nearly $11 trillion worth of America's current record-high $15 trillion in debt. Meanwhile, wages are rising along with prices, essentially shrinking the real value of that debt. The same inflation benefit applies to anyone paying off federal student loans, which also have a fixed interest rate. As your income increases, you're essentially getting a discount on what you have to repay.

So far, wage growth broadly hasn't kept up with price increases, but analysts say that may change in the new year as shipping bottlenecks begin to ease.

Household incomes have been bolstered by government transfers such as stimulus payments and unemployment benefits. In the first eight months of this year, personal incomes — which includes earned wages and government payments — were 15% ahead of where they were in 2019, says Daniel Alpert, managing partner of Westwood Capital.

"That's hundreds of billions of dollars ... and was already on top of very high accumulated savings by households, which was a result of their having nothing to spend it on because everybody in 2020 was locked up."

Inflation's losers

Not all debt shrinks with inflation, of course. Credit card interest rates, which largely aren't fixed, have shot up this year to an average of 17.13%, just under the all-time record high of 17.14% that was reached in 2019, according to the Federal Reserve. And anyone living on a fixed income, such as retirees, who aren't benefiting from wage increases that people in the labor force are seeing, are feeling extra pain as prices go up.

Another group getting hit are people with exposure to government bonds — think households with more than $1 million who typically invest in both equities and debt.

"Who are the ones that are going to be hurt by holding a lot of 10-year bonds or even 30-year bonds? That tends to be higher-income households, says Smetters. "So they're going to lose with higher inflation."

That's because those bond holders, who are essentially lending money to the government, will be paid back in money that has less purchasing power.

'We just don't know which end is up'

There's a sticky psychological side to inflation, however, that makes it hard to clearly define winners and losers. Because even though wages are rising and job growth is strong, Americans are bummed about the state of the economy.

The consumer sentiment index fell to a decade low in early November, according to data collected by the University of Michigan.

"The November fallout has inflation's name written all over it," said economists at Wells Fargo in a recent note.

One in four people surveyed said inflation has worsened their living standards. And half said they expect inflation to wipe out whatever wage gains they were given over the past year.

"My sense is that people are exhausted by the level of chaos that we have, and inflation is a symptom," said Wendy Edelberg, a senior economics fellow at the Brookings Institution. "So we have the economy surging, but how long is it going to surge for, and who is it surging for? And is it surging in a healthy way? Is it surging in a non-healthy way?"

Edelberg concluded: "Inflation just feels like a really tangible piece of evidence that we just don't know which end is up."

— CNN Business' Anneken Tappe contributed to this article.