Table of Contents Hide
- What is Unanticipated Inflation?
- What is the Effect of Unanticipated Inflation?
- What is the Misconception Surrounding Unanticipated Inflation?
- Frequently Asked Questions
- What is unanticipated inflation?
- Does anyone benefit from unanticipated inflation?
- Who loses during unanticipated inflation?
- Wrap Up
- We Also Recommend
It is no longer news how inflation is the continuous rise in the price index of commodities but there’s a shocking reaction that comes with wanting a product but not being able to get it because of an emergency hike in price. While you may know your way around handling inflation, the effects of unanticipated inflation may hit you really hard that you question your preparedness.
This article will cover the basics of unanticipated inflation, who get hurt by it, and reveal better ways to deal with it.
Have a good read.
What is Unanticipated Inflation?
Basically, this type of inflation is one that leaves people unaware that there is looming inflation until there is a general rise in price. During this time, many things go amiss, especially in the business line.
People are left clueless and defenseless and lenders get to receive monies with lower purchasing power than they had at the time the loans were given.
Hence, the existence of those who would gain and those who would lose out.
Who Benefits From Unanticipated Inflation?
As should be, every real-life situation presents itself with the possibility of being favorable to some group of persons. They are called the gainers.
When unforeseen inflation happens, employees with rising income and people with debt are the ones who gain from it. Debtors who pay with a dollar that has lost purchasing power save money on their loans, unlike banks.
Other groups of persons who win are;
- Debtors who are on a set payback schedule
- Government with a large public debt
- Landowners and physical asset owners
Debtors who are on a Set Payback Schedule
Whether as an individual or a corporate firm who is in debt, this kind of inflation makes it easier to repay debts you have accrued. Businesses that are in debt can as well raise consumer prices and use the extra cash to offset the debts.
However, if a bank borrowed money from a bank at a variable mortgage rate. If inflation rises and the bank raises interest rates, the cost of debt repayments also spikes up.
Government with a Large Public Debt
If the unanticipated inflation is stronger than predicted, it can make it easier for the government to reduce the real worth of its debt.
Landowners and Physical Asset Owners
While those with savings may notice a quick drop in the real worth of what they gathered in savings, landowners and those who own actual assets are safe.
This is because, during unanticipated inflation, the demand for gold increases. However, it is expedient to note that gathering as many gold assets as you can doesn’t guarantee an increase in value.
You may want to ask why. It is due to the fact that the price of gold is susceptible to speculative pressures.
Who is Hurt By Unanticipated Inflation?
So long as unanticipated inflation keeps reoccurring, it will hurt retirees who are on a fixed income. This is so because they cannot receive a pay raise.
As such, what they receive does not carry them till when next they get paid. Another set of those who bear the brunt of the situation is outlined in the list below.
- Fixed-income employees
- Borrowers with fluctuating interest rates
- The economy suffers from overall economic uncertainty
Historically, savers have lost money because of inflation. When prices rise, money loses its worth, and savings lose their true value.
People who had saved their entire lives could have the value of their savings wiped out during periods of unanticipated inflation since their savings became effectively useless at higher prices.
Workers with fixed-wage contracts are another group that unanticipated inflation could harm.
For instance, workers’ wages are frozen, and inflation is 5%. It means their salaries will be 5% less at the end of the year than they did at the beginning.
Borrowers with Fluctuating Interest Rates
Inflationary pressures may prompt the government or central bank to raise interest rates. A higher borrowing rate will result because of this.
As a result, homeowners with variable mortgage rates may notice considerable increases in their monthly payments.
Inflation that is both high and fluctuating generates anxiety for consumers, banks, and businesses.
There is a reluctance to invest, which could cause poorer economic growth and fewer job opportunities.
Hence, increased inflation leads to a decline in economic prospects over time.
If a country’s inflation is higher than that of its competitors, the goods it produces will become less sought after and so, will cause a drop for the exporters who in turn, find it difficult to sell their wares off.
What is the Effect of Unanticipated Inflation?
One major effect of unanticipated inflation is that it arbitrarily redistributes wealth from borrowers to lenders. Here’s how.
When people decide to either borrow or lend out some cash, they steadily evaluate the rate of inflation and what effect it will have on them.
When the rate of inflation differs from expectations, the amount of interest repaid differs from what their expectation was.
Generally, we could say that unanticipated inflation arbitrarily;
- Subsidizes people who are paid a set amount of money
- Imposes taxes on people who receive a certain amount of money as payment
- Punishes people who borrow money
- Rewards savers
What is the Misconception Surrounding Unanticipated Inflation?
People believe inflation is a terrible experience for everyone just because no one loves to buy exorbitant commodities. However, this isn’t totally true because inflation brings the purchasing power of money to zero level.
Hence, borrowers benefit from a higher rate of inflation at the time of repayment.
Frequently Asked Questions
What is unanticipated inflation?
Unanticipated inflation is a type of inflation that leaves people unaware of the fact that it has happened until there is a general hike in price.
Does anyone benefit from unanticipated inflation?
Of course, it favors some groups of individuals such as; debtors, landowners, and the government.
Who loses during unanticipated inflation?
the people who are hurt most by unanticipated inflation are savers, exporters, people with a fixed income, and the economy.
As much as unanticipated inflation doesn’t do you much good, bear in mind that it is favorable to someone else and there is little or almost nothing to do to stop such experiences from arising.
I hope this article enlightens you more on financial knowledge. You too could be more of a saver than a borrower.