Helped or hurt by inflation
ECN221 Week 2 Assignment
Helped or hurt by inflation
Inflation, the rise in prices and the fall in purchasing power. So, who does it hurt, and who does it help? To first look at inflation, it is to assume that it will affect everyone equally. The fact of the matter is that everyone is not affected equally. You might think the poor would be affected the most, due to lower income and the cost of goods rising. However, inflation indexing pledges low-wage workers a wage that keeps up with the rising costs of goods and services. So strangely, if the minimum wage earners are also deep in debt inflation actually helps them to stay afloat. Those that are hurt by inflation are individuals that have a lot of cash on-hand or assets with a negative real interest rate and even those on fixed incomes.
Inflation doesn’t just affect consumers, businesses can suffer from inflation as well. The most obvious impact inflation has on a business is through its consumers. When business are forced to raise their prices this causes consumers to stay away or search for alternatives. Along with rising prices, businesses have to pay more in materials and inventory. This can hurt business, when the cost to replace or increase inventory is more than the inventory sold, this can lead to inventory shortages due to losing money selling off the original stock. Another group that will suffer is retirees who have built up pension plans or invested at a fixed interest rate on the flip-side, someone that borrows at a fixed interest rate will benefit. Renters are hurt by inflation due to paying back higher rent. One of the biggest losers due to inflation are the elderly due to their income isn’t indexed to inflation.
Inflation can help and may benefit regular people in the population. If a borrower of money at a fixed rate from a lending institution can come out ahead on interest payed back if inflation rises. In doing so changes the real interest rate of a loan that is needing to be re-paid. The borrower of a fixed interest rate can benefit from inflation and the lender will be at a loss. According to Mark Thoma, professor of economics at the University of Oregon in Eugene, anyone with large, fixed-rate debts like mortgages benefit from higher inflation, “They’re going to be paying back with devalued dollars,” A higher inflation rate also helps homeowners who bought during the peak of the real estate boom and now owe more than their home is worth by building equity quicker. Investors in the stock market can also benefit with the raise in price of goods, also increases the values of the company.
In conclusion, many people can easily win or lose due to inflation. Inflation is meant to help control the economy and prevent things like “The Great Depression” from ever happening again. Due to the callous way GDP came about, does nothing to directly help the American people at living happier and successful lives. Everywhere you look, our streets are filled with homeless and hungry American citizens and even veterans that served our country. Nevertheless, nothing is done for their relief because their assistance has nothing to do with GDP, nor does it benefit any of the rich directly. I believe the biggest problem of inflation to be just how bad the time lag is that lies between the higher cost of goods and wages being indexed. I believe if both facets were approached concurrently at a very low dollar amount, perhaps the whole process could be easier for everyone in the country to benefit equally. The way it is set up now, the only party to benefit from this occurrence is the Government when consumers pay back their loans.
College, O. (2014). Principles of Economics. Houston: Rice University.
Tepper, T. (2018, February 15). Winners and losers if inflation skyrockets. Retrieved from Bankrate: https://www.bankrate.com/investing/winners-and-losers-if-inflation-skyrockets/