One other comment- I think it is fair to say that prices can rise and fall without having inflation or deflation, but rather based on supply and demand. People with weath can react to inflation more quickly. With deflation, maybe we’ll have a shot of finally keeping up. This benefits lenders because people need more time to pay off their previous debts, allowing the lender to collect interest for a longer period. Oil is a huge tax on the average consumer. It’s free to sign up and explore. increase the cost of your rent). At best, we can inflate or way out of some of our obligations. All An explanation of the potential costs of inflation - uncertainty, lost competitiveness, lower growth. ADVERTISEMENTS: Some of the major effects of inflation are as follows: 1. Wouldn’t we be happy if all you can eat roast beef buffets only cost $14.99 instead of $24.99? Deflation: a sustained decrease in the general (average) level of prices. Deflation initially looks good due to declining price of everything but as time passes by the deflation shows its true devastation in the form of lower wages or salaries to employees as companies don’t have profits to pay its employees, lower production and lower growth which ultimately affect everyone and it leads to vicious circle where no company or individual wants to invest and everyone wants to keep cash with them. DEFLATION SCREWS THE RICH MORE AND HELPS THE POOR. Because of its destabilizing effects on the economy, unexpected inflation is of considerable concern to economic policymakers. Overall, I am not too worried about inflation or deflation. When people are scared to spend, the demand for goods and services goes down. Your email address will not be published. If inflation erodes the value of our currency over time, then it must be true that deflation strengthens the value of our currency over time. The irony is, they should have as many children ASAP since the longer they wait, the more their tuition will go up! Deflation hits hard rich people as compared to poor people because in case of deflation value of majority of assets falls and rich people hold more assets as compared to poor people and hence they are at more loss as compared to poor people. b. Joy, who has borrowed 40,000 to pay for her education. Deflation has similar problems as inflation but working in reverse. Because the value of saved amount become less with unexpected inflation. As more and more lose jobs, demand continues to spiral downward. The Federal Reserve doesn’t have to do much since the market is adjusting rats lower for them. For the rest of us working folk with mortgages and tuitions to pay, deflation is one of the best things we can hope for! answer choices . Monthly premiums for over a $1,000 for a family of 3 for the self-employed when the median household income is $50,000 is quite expensive. I don’t think inflation or deflation helps the rich or the poor – it depends where your assets are concentrated. Although deflation means that interest rates are low, and that our return on our cash in CDs and Money Markets are therefore also low. If you are super wealthy, it usually means you have an incredible amount of assets. Effects on Production 3. In addition, the poor are generally renters so they don’t even benefit from a “cheaper” mortgage while they are paying higher prices for their groceries. Unexpected Inflation Benefits Borrowers But Does Not Affect Leners. Your home is for shelter. Which of the following would most likely benefit from unexpected DEFLATION? Lesson summary: The costs of inflation. Japan back in the day built their success on a weak yen. Couples should still make sure they are financially ready to take on the responsibility of becoming parents of course, but that certainly is an advantage to having kids now versus in 5 years. Which of the following will suffer the most from inflation? With higher uncertainty, lenders ask for a premium to compensate for the uncertainty. Joy, who has borrowed 40,000 to pay for her education. Mike, do you think we are therefore in monetary stability scenario now? helps debtors. a fall in the overall level of prices. 159.Who loses when there is unexpected deflation? Differences between Price Skimming and Penetration Pricing, Selling Concept of Marketing Advantages and Disadvantages. It does seem to affect those with a high net worth more than the poor. Manage Your Finances In One Place: Get a handle on your finances by signing up with Personal Capital. 1. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income. Unexpected Deflation Benefits Lenders But Does Not Affect Borrowers. Don't subscribe Healthcare costs are out of control here in the US vs. other countries such as Canada, Australia, and France. Lenders. When prices drop on a certain item, like gasoline or computers, consumers reap the benefit … As one can see from the above that deflation has both advantages and disadvantages, however its disadvantageous are more severe and have long lasting impact and that is the reason why governments across the world prefer inflation rather than facing deflation. 41. Healthcare costs and college tuition costs worry me the most. Your turn : If the public expect the price level to decrease, what may happen to current consumption and production? Traditionally savers lose from inflation. Unexpected inflation or deflation takes wealth away from one group and gives it to another group. Where I think deflation would probably come in to play regarding consumers purchases are in the items we don’t buy on a daily basis–TV, homes, etc. This video talks about the winners and losers from inflation and deflation. Lenders would be happy though, provided they get paid back. China relies on a weak currencies to make sure their exports are unrealistically cheap. In a way one can say that deflation helps in narrowing the gap between the rich and poor. unexpected inflation. The poor have little to no assets, hence why deflation hurts the poor less than the rich. Unexpected Deflation Benefits Lenders But Does Not Affect Borrowers. This was a very thought provoking article and I enjoyed it. In order to understand this concept better let’s look at advantages and disadvantages of deflation –. My kids are young (3 and 1) and imagining what their college may cost is the stuff of nightmares! Karen, a retired school teacher that relies upon her fixed pension to pay for her expenses. Workers Consumption Unexpected inflation rate = actual inflation rate – expected inflation rate Your turn : Who benefits from unexpected inflation? I’ve never felt more pain and disagreement while suffering through and article. Get free refinance or purchase quotes in minutes. Studies say that more than 50% of us are overweight with the percentage growing. D. Unexpected deflation benefits lenders but does not affect borrowers. Sign up for the private Financial Samurai newsletter! Even if we have 100% deflation, the most the median person can lose is $77,000, unless of course they are leveraged to the hilt. However, there's a difference between isolated price drops for certain items and economy-wide deflation. Imagine if donuts where no longer over $1 each but only 25 cents a pop? Deflation will produce shortages as many businesses go bankrupt with revenues falling faster than costs, negative equity cases as house values decline but mortgages do not, rising unemployment as businesses cannot afford to keep staff and salary cuts for those who remain employed, a collapse in government revenues as profits and incomes and the taxes paid on them collapse with the inevitable increases in tax rates and cuts in entitlement programmes that must etc etc. Workers will be laid off to compensate for the diminishing demand. There was lots of deflation in the 1930s and I don’t think that’s an economic experience anyone would be keen to repeat. Because the value of saved amount become less with unexpected inflation. A real estate agent who leaves a job in Texas and searches for a similar, higher paying job in California. Unanticipated inflation reduces the validity of the information on market prices for economic agents. In this article, we'll examine the fundamental factors behind inflation, different types of inflation, and who benefits from it. Which of the following is an example of frictional unemployment? What Drives Inflation . It's nice when prices drop. Unexpected inflation always redistributes wealth from people who have contracted to receive fixed nominal amounts in the future to the people who have contracted to pay those fixed nominal amounts. hyperinflation. A decade or so ago, when the dollar was weak, we had multiple foreign auto companies build plants here, simply because the dollar was weak. If I owe someone $100,000 and my income slowly falls then the debt is increasing in real term. Well said Joe. How little you think of the general population. Sam spent 13 years working at two major finance companies. If gas prices were doing to the $1 again, I’d go on road trips every single week and not care. Look at electronics technology. And america has a lot of debt that will likely never get paid. Deflation refers to that situation where there is general decline in prices of goods and services, it happens when inflation rate fall below zero percent. At first glance, deflation sounds like a good thing. Deflation is worse than inflation because interest rates can only be lowered to zero. Unanticipated deflation has the opposite effect. I don’t really eat them now, but yeah if they were only 25 cents each I probably would enjoy one once in a while! Your email address will not be published. The pandemic has reminded us that tomorrow is not guaranteed. Since it benefits debtors and hurts creditors, in practice unexpected inflation is often a transfer of wealth from the rich to the poor. In contrast deflation negatively effects many people. Published: 08/04/2017 | Updated: 07/11/2019 by Financial Samurai 22 Comments. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize. Other Effects! Is having a weak dollar such a bad thing? This is evidenced by the low 10 year yields and healthy stock market. Deflation is the natural result of more efficient production and the expansion of knowledge. And that’s an interesting point about people trying to have their kids sooner rather than later with the crazy amount of inflation that’s affecting education. A)nominal-asset holders B)borrowers C)lenders D)nominal-asset holders, borrowers, and lenders 160.Deflation leads to winners and losers; for example: A)mortgage holders lose, but banks awaiting mortgage payments benefit. That reduces demand and slows growth. Which of the following will most likely result from deflation? I don’t see deflation threatening use, yet. Now, I can just log into Personal Capital to see how my stock accounts are doing, how my net worth is progressing, and where my spending is going. Also costs of hyperinflation. 3) If you have dependents and/or debt, it’s good to get term life insurance to protect your loved ones. Effects on Redistribution of Income and Wealth 2. During deflation the value of debt of a borrower rises and becomes increasingly more difficult to repay. Politicians win votes with spending, not long term fiscal responsibility. 1) Take advantage of record-low mortgage rates by refinancing with Credible. He retired in 2012 with the help of his retirement income that now generates roughly $250,000 passively. In addition, the poor are generally renters so they don’t even benefit from a “cheaper” mortgage while they are paying higher prices for their groceries. Interesting perspective :) I for one don’t mind a little deflation every once in awhile. It leads to high-risk premiums and economic uncertainty. We just learned that the median US net worth in 2016 has gone nowhere in over 40 years! I’ve yet to find someone who can make a strong case that what we want is a strong currency. Use the descriptions below to determine if they have benefited "Winners" or have been harmed "Losers" by unexpected inflation. The poor certainly aren’t those people. The only reason prices go up each year is the currency. Savers. Banks and government sure are. While inflation often has negative connotations as it can increase the opportunity cost of money, discourage saving and ultimately lead to higher interest rates, there can be positive impacts too. Practice: The costs of inflation. Unexpected Inflation Benefits Lenders And Hurts Borrowers. Don’t the wealthy have a lot of CASH, which does very well in deflation? Use the descriptions below to determine if they have benefited "Winners" or have been harmed "Losers" by unexpected inflation. Deflation means that the average general prices are falling at … 2) For more stable investment returns and potential outperformance of volatile stocks, take a look at Fundrise, a top real estate crowdfunding platform for non-accredited investors. When price rises or the value of … Herb, who keeps his savings in an old coffee can. Salary may be cut if the environment is deflationary. I don’t know where they get it from but they are yum, yum. Financial Samurai is now one of the largest independently run personal finance sites with 1 million visitors a month. Unexpected inflation always redistributes wealth from people who have contracted to receive fixed nominal amounts in the future to the people who have contracted to pay those fixed nominal amounts. The best feature is the 401K Fee Analyzer which has saved me over $1,000 a year in portfolio fees I had no idea I was paying. Deflation is also wonderful for those of us who are retired. 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