ECO203 Week 2 Discussion 2 Who Benefits and Who Loses from Inflation?

Inflation has been a word that makes me cringe. To me, inflation has meant that I will have to pay more for something now than I used to have to pay for it. After reading about inflation and how it can affect the economy, I don’t see it as only a bad thing; it could be good for our economy. For lenders and borrowers, inflation can make the lender lose and the borrower gain from unexpected inflation. If the lender was aware of inflation they would adjust the interest rate to compensate for the increase, but if they don’t know they could use an interest rate that wouldn’t cover the inflation change for the loss of purchasing power which is bad for the lending firm. Asset prices will change with inflation. Fixed-price assets will lose purchasing power, but physical assets could gain. Some individuals will use inflation hedging (if they are aware that inflation is coming) as a way to prepare for inflation. They can purchase the land, jewelry, or home at a lower price before the inflation and then sell it at a higher price than purchased after inflation has hit, so they gain from inflation. Taxes increase faster than inflation, so the federal and state government gains where the household will lose. Individuals on fixed incomes, lower and middle class, will have a harder time making ends meet. Inflation will help with the government with debt and spending, this should boost the economy, but when households suffer it is a drawback for their economic spending. Economists look for the perfect balance. I think that is why they debate and disagree because this isn’t an exact science and the ‘human’ component of the economy is not consistent and often unpredictable.

Reference

Amacher, R., & Pate, J. (2012). Principles of Macroeconomics [Electronic version]. Retrieved from https://content.ashford.edu/