EFFECT OF INFLATION
Before we delve into the effect of inflation let's first know what is inflation as term. Inflation is simply the general increase in the level of prices of things and the cost of living. It is well established that all poor and middle class men suffer this drastic change all the time while the sophisticated people or institute device it to their benefit.
Inflation is good for borrowers and bad for lenders because it reduces the value of the money paid back to the lenders. The inflation rate is built in to the nominal interest rate, which is the sum of the real interest rate and expected inflation.
When the inflation rate rises or falls unexpectedly, wealth is redistributed between creditors and debtors. In general, this means that those with savings in the form of currency or bonds lose money from inflation. Those with negative savings (debt) or savings in the form of stocks, however, are better off with higher inflation. In demographic terms, unexpected inflation often manifests as a wealth transfer from older individuals to younger individuals.
Inflation creates other opportunities for sophisticated institutions to unfairly take advantage of the average individual, in many people's minds. Inflation can increase the complexity of evaluating financial assets, from CDs and insurance policies to stocks and bonds. This shifts the distribution of power in the financial marketplace to the more sophisticated and knowledgeable actors to the detriment of the average person, in this view. Thus, the government might "forget" to change the tax brackets after an inflationary episode, so the average person would end up paying higher taxes.
Let's spend the majority of our time in this lesson talking about unanticipated inflation. Unanticipated inflation hurts savers and creditors because the money they lend out gets paid back in cheaper dollars over time. On the other hand, unanticipated inflation helps borrowers and debtors because they borrow money at a fixed rate and pay it back in cheaper dollars over time. Here's another way to say this: unanticipated inflation redistributes wealth from savers to borrowers. When you're trying to determine who is hurt or helped by surprise inflation, you have to first determine if they are considered a saver or creditor (meaning that they loan out money) or are they are a borrower or debtor (meaning that they are borrowing money).
Thanks for reading us. We appreciate your time, please always come for more.
Before we delve into the effect of inflation let's first know what is inflation as term. Inflation is simply the general increase in the level of prices of things and the cost of living. It is well established that all poor and middle class men suffer this drastic change all the time while the sophisticated people or institute device it to their benefit.
Inflation is good for borrowers and bad for lenders because it reduces the value of the money paid back to the lenders. The inflation rate is built in to the nominal interest rate, which is the sum of the real interest rate and expected inflation.
When the inflation rate rises or falls unexpectedly, wealth is redistributed between creditors and debtors. In general, this means that those with savings in the form of currency or bonds lose money from inflation. Those with negative savings (debt) or savings in the form of stocks, however, are better off with higher inflation. In demographic terms, unexpected inflation often manifests as a wealth transfer from older individuals to younger individuals.
Inflation creates other opportunities for sophisticated institutions to unfairly take advantage of the average individual, in many people's minds. Inflation can increase the complexity of evaluating financial assets, from CDs and insurance policies to stocks and bonds. This shifts the distribution of power in the financial marketplace to the more sophisticated and knowledgeable actors to the detriment of the average person, in this view. Thus, the government might "forget" to change the tax brackets after an inflationary episode, so the average person would end up paying higher taxes.
Let's spend the majority of our time in this lesson talking about unanticipated inflation. Unanticipated inflation hurts savers and creditors because the money they lend out gets paid back in cheaper dollars over time. On the other hand, unanticipated inflation helps borrowers and debtors because they borrow money at a fixed rate and pay it back in cheaper dollars over time. Here's another way to say this: unanticipated inflation redistributes wealth from savers to borrowers. When you're trying to determine who is hurt or helped by surprise inflation, you have to first determine if they are considered a saver or creditor (meaning that they loan out money) or are they are a borrower or debtor (meaning that they are borrowing money).
Thanks for reading us. We appreciate your time, please always come for more.
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