This material will help the reader figure out who is least affected by unforeseen inflation. But first you need to understand what this phenomenon is. It should be noted that as a result of unforeseen inflation, some members of the society are enriched and, at the same time, others become poorer. In other words, there is a process of redistribution of income between economic agents.
Unforeseen inflation
First of all, it can be noted that the result of this economic phenomenon is the transfer of funds from creditors to debtors. The mechanism of such redistribution is quite simple and clearly demonstrated using the formula: R = r + π e, where R is the nominal interest rate, r is the real interest rate and π e are the inflation rates. An example is the following situation. If we assume that the lender wants to earn 5% on the loan, and the inflation rate is expected at 10%, then the nominal rate will be 5% + 10% = 15%.
At the same time, provided that the inflation rate is at the level of 15%, the lender will not receive any profit from the issued loan: r = R - π e, or r = 15% - 15% = 0. Who will be least affected by the unexpected inflation, if its indicators are 18%? The borrower. Since r = R - π e, or r = 15% - 18% = -3%. In this case, a 3% income will be redistributed in favor of the debtor. From the proposed example, we can conclude that periods of unexpected inflation are a favorable time for obtaining loans and, conversely, unfavorable in order to issue them.
Consequences of Unforeseen Inflation
What other examples can be given regarding the redistribution of wealth and income between various economic agents? Who is least affected by unanticipated inflation? Companies that have their own staff. In this case, firms win, and employees lose in income, since by the time they are issued in the form of wages, money will already be exposed to unforeseen inflation and will lose part of its price.
In addition, it should be noted that such a redistribution occurs between workers with fixed incomes and people with fixed incomes. The former do not have the ability to do anything to counter unforeseen inflation, as they receive a predetermined salary. In this case, it is necessary to carry out indexation of income, but far from all companies, management management follows this path.
On the contrary, employees with fixed incomes are least likely to suffer from unforeseen inflation, as they have the opportunity to increase their actual earnings in accordance with its pace. In addition, their well-being will not only not decrease, but often may increase.
It should also be emphasized that during unforeseen inflation, income is redistributed from people who have money savings to those who do not have such savings. The real value of deferred cash in the process of rising inflation is reduced. Accordingly, the wealth of the owners of this money is decreasing. In addition, redistribution occurs from the elderly to the young, as well as from all economic agents who have cash, to the state. Those who became debtors when prices were lower will become poorer.
