Question #25687

How unanticipated inflation affect overall purchasing power for an economy?

Expert's answer

Influence of Unexpected Inflation:

1) Arbitrary redistribution of wealth from lenders to borrowers. When inflation turns out to be different from expectations, some groups can be made better off, while others can be made worse off. For instance, when inflation turns out to be higher than expected, lenders can realize losses, while borrowers can gain.

2) Costs to individuals on fixed nominal contracts. Many long-term contracts build in an adjustment for inflation. People whose contract payments are fixed will suffer a loss in real terms (that is, in terms of purchasing power) if inflation turns out higher than they expected. For example, if pension payments are fixed for many periods and inflation ends up being higher than expected, then real pension payments end up being lower than expected.

1) Arbitrary redistribution of wealth from lenders to borrowers. When inflation turns out to be different from expectations, some groups can be made better off, while others can be made worse off. For instance, when inflation turns out to be higher than expected, lenders can realize losses, while borrowers can gain.

2) Costs to individuals on fixed nominal contracts. Many long-term contracts build in an adjustment for inflation. People whose contract payments are fixed will suffer a loss in real terms (that is, in terms of purchasing power) if inflation turns out higher than they expected. For example, if pension payments are fixed for many periods and inflation ends up being higher than expected, then real pension payments end up being lower than expected.

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