Question

Identify several parties likely to be helped and hurt by inflation.

Short answer

Parties likely to be helped by inflation include borrowers (especially those with fixed interest rates), business owners, and wage earners with wage indexation. Parties likely to be hurt by inflation are savers, retirees living on fixed incomes, consumers in general, and lenders (particularly those who lend money at fixed interest rates).

Step-by-step solution

Understanding Inflation

Inflation occurs when the demand for goods and services in an economy rises, leading to an increase in production costs or an expansion of the money supply. This increase in prices erodes the purchasing power of money, meaning one unit of currency can buy fewer goods and services than before.

Parties likely to be helped by inflation:

(1) Borrowers: Borrowers, particularly those with fixed interest rates, may benefit from inflation as they can repay their loans with money that has less purchasing power than when they originally borrowed it. (2) Business Owners: Business owners may be able to increase the price of their goods and services in line with inflation. This can lead to higher revenues and potentially higher profits if costs do not rise at the same rate as prices. (3) Wage earners with wage indexation: Employees whose wages are indexed to inflation may experience wage growth that keeps pace with or outpaces the rate of inflation, protecting their purchasing power.

Parties likely to be hurt by inflation:

(1) Savers: People who hold cash or bond investments might see the value of their savings eroded by inflation as the purchasing power of money decreases. (2) Retirees living on fixed incomes: Since many retirees live on fixed incomes, such as pensions or annuities, they may find it more difficult to make ends meet as the cost of living increases due to inflation. (3) Consumers in general: Higher inflation can lead to a reduction in purchasing power, meaning people may be unable to buy as many goods and services as they previously could. This can negatively impact their quality of life. (4) Lenders: Banks and other financial institutions that lend money at fixed interest rates can see the real value of the money they receive in repayments decrease due to inflation. This can lead to reduced profits or even losses.