Question

We often hear of inflation characterized as a bad thing, but Meyer describes both winners and losers from inflation. Give an example of one way in which you would win from unexpected inflation, and an example of one way in which you would lose from unexpected inflation.

Answer 1

Inflation can be defined as rise in the level of prices continuously. During inflation, the value of money decreases and the purchasing power also drops down.

An unexpected inflation is the period which is not anticipated beforehand. There are both sides to the coin, some people benefit from inflation whereas some are the losers.

An example of the people that are considered as winners during unexpected inflation are those which are in high debts and own physical assets and land. The repayment of outstanding debts is easier during the period of inflation as the increased prices generate increased incomes in the business.

The people with savings suffer the most as most of the savings are spent on the increased prices. On the other hand, people who own physical assets such as land or gold etc will benefit during this period as increased prices will retain the value of them.

On the other hand, an example of the people that are considered as losers during the period of unexpected inflation are those who save the money or live on fixed incomes. For example workers who have fixed incomes or retired people that have a fixed amount of money suffer the most. Increased prices increases the overall expenses and hence all the savings and income is spent. The purchasing power is reduced.

Borrowers also are in a loss during this period as reduction in the value of money affects them the most.

In this way there are both winners and losers during inflation.