Question

Describe how the individual in your scenario will be affected by inflation. Consider the effects of inflation, deflation, and unexpected inflation.

Theresa Auto worker / Union member My name is Theresa. I’m an auto worker at the car factory. My company is high tech and has automated our production line. I have an important job because the buttons I push determine how your car interior is made. Yep, one button selects the type of seats, another button determines the color of the seat fabric and the last button plops the seat on the car frame. It’s a boring job but important because it must be done carefully. If I make a mistake, it’s very expensive for the company to correct it after the car has left the factory. I’m proud to be part of the auto-workers’ union because it really cares about its members.The union just negotiated a new five-year labor contract with a hefty raise plus an annual cost-of –living adjustment – what they call a COLA, and no, it’s not a type of soft drink. Let me tell you why I am so excited about our new contract: My wages are guaranteed to keep up with the inflation rate, no matter what it is, and I get an annual raise on top of it. I’m a great supporter of my union!

Answer 1

The individual, in this case, will not be affected by the inflation be it expected or unexpected. As the union has negotiated a contract which keeps into account the inflation whether it is increasing or decreasing it will fill up for any decrease in the real value of money.

For example, if the inflation in future increased at a rate of 10%. It means the cost of living is increasing at a rate of 10% and the current salary should also increase by 10% to manage the real value of wages earned. Here, COLA or cost of living adjustment will increase by 10% and manage the real purchasing value of the salary earned by the employees and they will be shielded by any amount of increase in inflation.  

If the inflation is expected the COLA will rise to that amount and even if it is unexpected the COLA will have to rise as per the contract and keep the real value of wages intact.  

IF there is a deflation in the economy i.e. price decrease to an unexpected level which happens in case of a glut. The COLA will decrease and adjust to maintain the value of wages.