Anticipated Inflation
Anticipated vs unanticipated inflation, menu costs and shoe-leather costs are covered with exam technique in the Economics Made Simple Complete Bundle — textbook, practice questions with mark schemes, flashcards and 100 case studies.
We can simply understand this phenomenon by its title “ANTICIPATED” , which means Predicted or “KNOWN”. Such a “PREDICTED INFLATION” does not cause enough harm to the people since you can handle it by proper planning. For Example you know that the Price of household products may increase for some known factor that has caused the prices of Inputs to rise. As a result, you can take proper steps of saving enough for future to counter this effect.
Additionally, when inflation is anticipated you can forecast your business progress as well. And also the bank interest rate levels for borrowing which consequently leads to a sustained economy.
Unanticipated inflation:
Unanticipated or UNEXPECTED inflation may cause a lot of problems for people. You can trust money because it loses its value. Also, lenders are at great risk when there is unexpected inflation. Because your wealth is redistributed to the borrowers. So:
- Lenders are losing more and borrowers are gaining as money loses its value.
- Borrowers are in a winning state because nominal interest rates are consumed by Inflation. What you are giving back to lender is not worth it should be.
- Employers will benefit because they would be paying lower real wages and workers are at loss because they would still receive lower real wage which means that their purchasing power will decrease.
Conclusion
Inflation when forecasted does not harms as much as wrong prediction or forecast can create. It is these distributional effects (from lenders to borrowers) that makes Unanticipated Inflation more dangerous than the anticipated one.
(Up Next: Balanced and Unbalanced Inflation)