Who is hurt and who is helped by inflation? Helped or Hurt

Inflation General Rise in Prices Over Time

Causes 1. Demand Pull Factor- Demand increases cause prices to go up 2. Cost Push Factor- Input costs, such as wages, push up prices 3. Quantity Theory- An increase in the money supply leads to increased prices Wage-Price Spiral occurs when 1 and 2 lend to each other

Effects Hurts Savers with Fixed Interest Rates Hurts people on Fixed Incomes (reduces purchasing power) Hurts lenders who are being paid back with less valuable dollars Helps Borrowers on fixed rates of interest who pay back with less valuable dollars Helps government when borrowing as well

Effects Purchasing Power- Dollar will not buy as much as it could before Income- Erodes fixed incomes that do not have a Cost of Living Adjustment (COLA) such as a pension Social Security (SS) includes a COLA Interest Rates- Savers need to beat the inflation rate with higher interest returns otherwise they lose money

In Summary (write this down!) Individuals who receive fixed incomes are HURT by inflation Lenders and savers People who make fixed payments are HELPED borrowers

1. Banks extend many fixed-rate loans. HURT The money the bank receives for the loan repayment will be less in real terms (purchasing power) than the loan amount.

2. A farmer buys machinery with a fixed-rate loan to be repaid over a 10 year period. HELPED Farmer makes payments that are less in real terms than the loan amount.

3. A family buys a new home with an adjustable-rate mortgage that is above the rate of inflation. (Think of Jerome) HURT The amount you pay each month will increase as inflation increases.

4. A widow lives entirely on income from a fixed-rate pension 4. A widow lives entirely on income from a fixed-rate pension. (Think of Helga) HURT The purchasing power of the income will be less as inflation continues to deflate the value of the dollar.

5. A retired couple lives entirely on income from a pension the woman receives from her former employer that includes a cost of living adjustment (COLA) thought her union. (Think of Theresa) HELPED The purchasing power of the pension payment will be higher then the inflation rate because of the COLA.

6. The federal government has a five billion dollar debt. HELPED The government will repay the debt with money that has less purchasing power.

HURT Revenue from contract will be worth less. 7. A firm signs a contract to provide maintenance services at a fixed rate for the next 5 years. HURT Revenue from contract will be worth less.

8. Your friend rents an apartment with a 3 year lease. HELPED Rent payments will remain the same even if prices go up.