Who is hurt by unexpected inflation

The following groups which will be hurt by unanticipated inflation are the flexible-income receivers. Creditors are the ones who lose from unanticipated inflation because both the principal on loans and interest payments they receive are usually fixed. Debtors benefit from unanticipated inflation because the value of their payments declines as their wages rise with inflation.

These supply shocks push up per-unit production costs and ultimately raise the prices of consumer goods. Unanticipated inflation arbitrarily redistributes real income at the expense of fixed-income receivers, creditors, and savers. If, on the other hand, the economy observes a higher percentage decrease in prices than expected deflation, we say that there is unexpected deflation in the economy. A Unexpected inflation benefits lenders and hurts borrowers. Inflation is not neutral, and in no case does it favor rapid economic growth.

The lower the inflation rate, the greater are the productive effects of a reduction. For example, reducing inflation by one percentage point when the rate is 20 percent may increase growth by 0. Inflation is a negative force for economic participants because it diminishes the purchasing power of income and savings, both for consumers and investors. The GDP deflator, a price index for all final goods and services, is a weighted average of the prices of all final goods and services produced in the economy.

Begin typing your search term above and press enter to search. This is especially true if inflation is higher than expected. For example in the s, markets expected low inflation so the government were able to sell government bonds at low rates of interest rates. However, in the s, inflation was higher than expected — and higher than the bond yield on a government bond.

Therefore owners of the bonds saw a fall in the real value of their bond, whilst the government saw a fall in the real value of its debt. In the s, unexpected inflation from oil price shock helped to reduce governments debt burden in various countries such as the US.

Between and , the nominal value of government debt rose, but inflation and economic growth helped the value of national debt to fall as a percentage of GDP. In a period of hyperinflation, those with savings can see a rapid fall in the real value of their savings. However, those who own physical assets tend to be protected.

Physical wealth — such as land, factories and machines will retain its value. In periods, of hyperinflation, there is often increased demand for assets, such as gold and silver. Gold cannot be subject to the same inflationary pressures as paper money as it cannot be printed. However, it is worth bearing in mind, that in a period of inflation, buying gold is not guaranteed to increase in real value.

This is because the price of gold can also be subject to speculative pressures. For example, the price of gold spiked in and then fell afterwards. However, in periods of hyperinflation, holding gold is a way to protect real wealth in a way money is not. In periods of negative real interest rates, it tends to increase profit margins for banks With base rates close to zero and very low saving rates, lending rates are higher than saving rates.

A good example of extreme inflation is Germany in the period , the inflation rate reached astronomical figures. Middle-class workers who had put a lifetime of savings into their pension fund found that in , the pension fund was worthless. After working for 40 years, one middle-class clerk cashed his retirement fund and used it to buy a cup of coffee.

In this hyperinflation, it led to great fear, uncertainty and confusion. People responded by trying to buy anything physical — like buttons, cloth — anything that might hold value better than money. However, not everyone suffered as much. Farmers did well because the price of food continued to rise. Business that had borrowed large sums found that their debts had effectively disappeared due to inflation reducing the real value of debt. These businesses could buy up over firms who had gone out of business due to the costs of inflation.

This kind of very high inflation creates significant grievance as inflation can appear like an unfair way to redistribute wealth from savers to borrowers. Great explanation. To better understand economy it is important to understand more about inflation and how inflation works. In summary: Inflation will hurt those who keep cash savings and workers with fixed wages. Inflation will benefit those with large debts who, with rising prices, find it easier to pay back their debts Video Losers from inflation Savers.

Savers can be protected from inflation if they can gain an interest rate higher than the rate of inflation. Workers on fixed-wage contracts Another potential loser from inflation are workers who are stuck on fixed-wage contracts. Inflation may particularly harm workers in non-unionised jobs, where workers have less bargaining power to demand higher nominal wages to keep up with rising inflation.

This period of negative real wages will particularly harm those who are living close to the poverty line. Those on higher incomes will be able to absorb a fall in real wages. Even a modest increase in prices can make it more difficult to purchases goods and services. The UK saw a rise in the use of food banks in the period In fact, rising wages was a cause of inflation in the s. Therefore, mortgage owners saw a fall in their variable rates and mortgage payments as a percentage of income fell.

General economic confidence If inflation is high and variable, it creates uncertainty for both consumers, banks and companies. Exporters If UK inflation is higher than our competitors, then UK goods will become less competitive and exporters will see a decline in demand and struggle to sell their goods.

However, if a bank borrowed at a variable mortgage rate from a bank. Then if inflation rises and the bank increase interest rates, this will increase the cost of debt repayments.

Banks and mortgage companies In periods of negative real interest rates, it tends to increase profit margins for banks With base rates close to zero and very low saving rates, lending rates are higher than saving rates. Those who owned land or physical assets were able to maintain their wealth. Related Causes of inflation Costs of inflation. We use cookies on our website to collect relevant data to enhance your visit. Our partners, such as Google use cookies for ad personalization and measurement.

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