Who will be least affected by unexpected inflation? Who is the winner?

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:41

This material will help the reader figure out who will be the least affected by unforeseen inflation. But first you need to understand what this phenomenon is. It should be noted that as a result of unforeseen inflation, some members of society are enriched and, at the same time, others become poorer. In other words, there is a process of redistribution of income between economic agents.

Unanticipated inflation

First of all, it can be noted that the result of this economic phenomenon is the transfer of funds from creditors to debtors. The mechanism of such a redistribution is quite simple and is clearly demonstrated using the formula: R=r + π^e, where R is the nominal interest rate, r is the real interest rate and π^{e- inflation rate. An example is the following situation. If we assume that the lender wants to earn 5% on the loan, and the inflation rate is expected to be 10%, then the nominal rate will be 5% + 10%=15%.}

At the same time, provided thatinflation will be at the level of 15%, the lender will not receive any profit from the loan: r=R - π^e, or r=15% - 15%=0. Who will be the least affected by the unforeseen inflation, if its performance is 18%? Borrower. Since r=R – π^e, or r=15% - 18%=-3%. In this case, the income of 3% will be redistributed in favor of the debtor. From the proposed example, we can conclude that periods of unexpected inflation are a favorable time for obtaining loans and, on the contrary, unfavorable for issuing them.

The consequences of unexpected inflation

What other examples can be given regarding the redistribution of we alth and income between different economic agents? Who will be least affected by unexpected inflation? Companies that have their own staff of employees. In this case, firms win, and employees lose in income, since the cash, by the time it is issued in the form of wages, will already be affected by unexpected inflation, and will lose some of its value.

In addition, it should be noted that such a redistribution occurs between workers with fixed incomes and people with non-fixed incomes. The former do not have the opportunity to do anything to counteract unforeseen inflation, as they receive a predetermined salary. In this case, it is necessary to index income, but not all companies go down this path.

On the contrary, employees with unfixedincome will be the least affected by unexpected inflation, as they have the opportunity to increase their actual earnings in accordance with its pace. In addition, their well-being will not only not decrease, but often even increase.

It should also be emphasized that during unanticipated inflation, income is redistributed from people who have cash savings to those who do not. The real value of deferred funds in the process of rising inflation rates decreases. Accordingly, the we alth of the owners of this money decreases. In addition, redistribution occurs from the elderly to the young, as well as from all economic agents who have cash to the state. Those who became indebted when prices were lower will become poorer.

Government benefit

By issuing additional cash, the state introduces a kind of inflationary tax on cash. It is also called "seigniorage". It represents the difference in the purchasing power of the currency before the issue of additional money supply and after the issue.