Question

Who wins and loses from inflation?

Answer 1

Inflation refers to the rise of prices for goods and services over a period of time in an economy. When there occur changes in the demand or supply for goods and services,rapid price rises of raw materials, fluctuation in the exchange rate, rapid wage increase of workers and growth of money supply outstipping the growth of economy; inflation in inevitable leading to falling currency rate, increasing cost of living with stagnating economy. Inflation brings both negative and positive impact to the section of people who face losses due to inflation while some section of people makes profit out of it.

People who win from inflation are-

(a) Stockholders:- Investors who deal with stocks get benefits as value of their companies go up with the price rise of goods and services. The value of stocks varies directly and proportionately with inflation. When the price of the goods and services double, the value of equity also doubles leading to the investors making more profits.

(b) Borrowers:- People who borrowed loans at fix ed rate derive grater benefit from inflation as they will be repaying in devalued currency rate which has less purchasing power with the rising price trend.

(c) Commodity investors:- People dealing with metals like gold, real estate etc will be gainer as these storable goods are good hedge against inflation.

People who lose from inflation are-

(a) Lenders:- People who lend money at a fixed interest rate lose from inflation as they are repaid back by devalued currency rate.

(b) savers:- People who save their money for a longer period greatly face loses as the interest rate for their savings never rises leading to much lower interest rate at the time of maturity compared to the increasing price rate due to inflation.

(c) Retiree:- Inflation leads to increasing wage rates of workers but retired people don't get any benefit out of it.

(d) Homebuyers:- Inflation leads to the quick increase of home prices and higher interest rates for home loans which cause greater losses to the first time home buyers as they end up paying more for their downpayments to EMIs from their earnings.