Glossary
Borrowers with Fixed Interest Rates
Individuals or entities who have taken out loans with an interest rate that remains constant over the life of the loan.
Example:
A homeowner with a 30-year mortgage at a 4% fixed rate benefits from unanticipated inflation because the real value of their future payments decreases, making them a borrower with fixed interest rates.
Borrowers with Variable Rates
Individuals or entities who have taken out loans where the interest rate can change over time, typically in response to market conditions or inflation.
Example:
If inflation unexpectedly rises, the interest rate on a credit card or adjustable-rate mortgage will likely increase, hurting the borrower with variable rates.
Firms That Can Cut Real Wages
Businesses that are able to reduce the purchasing power of their employees' wages, often by keeping nominal wages constant while inflation rises.
Example:
If a company maintains employee salaries while inflation is unexpectedly high, the real cost of labor for the firm that can cut real wages effectively decreases.
Inflation
A general and sustained increase in the overall price level of goods and services in an economy over a period of time.
Example:
If the average price of a basket of consumer goods rises from 103 in a year, the economy is experiencing inflation.
Loss of Purchasing Power
The reduction in the quantity of goods and services that money can buy, which occurs when inflation erodes the real value of money.
Example:
If your $50 allowance bought 10 movie tickets last year but only 8 this year due to rising prices, you've experienced a loss of purchasing power.
Menu Costs
The costs incurred by businesses when they have to change their listed prices due to inflation.
Example:
A local coffee shop spending money to print new price lists and update its online menu due to rising ingredient costs is an example of menu costs.
Moderate Inflation
A low and stable rate of inflation, typically considered beneficial for an economy as it encourages spending and investment.
Example:
A consistent 2-3% annual increase in prices is often considered moderate inflation, signaling a healthy, growing economy.
Nominal Value
The face value or stated value of an economic variable, measured in current dollars, without adjustment for inflation.
Example:
If your salary is $60,000, that is its nominal value.
Owners of Assets
Individuals or entities who possess valuable items such as real estate, stocks, or other tangible and intangible properties.
Example:
Someone holding a portfolio of real estate during a period of unanticipated inflation might see the nominal value of their properties increase significantly, making them an owner of assets who benefits.
Real Value
The value of an economic variable adjusted for inflation, reflecting its actual purchasing power.
Example:
If your $60,000 nominal salary can buy fewer goods and services this year due to inflation, its real value has decreased.
Savers
Individuals or entities who set aside a portion of their current income for future use, typically by depositing money in bank accounts or investing in financial instruments.
Example:
A retiree living on a fixed income from their savings account will find their money buys less if unanticipated inflation occurs, making them a saver who loses.
Shoe-Leather Costs
The costs, in terms of time and effort, that people incur to reduce their holdings of cash during periods of high inflation.
Example:
During hyperinflation, people might frequently visit the bank to convert their rapidly depreciating cash into assets or foreign currency, illustrating shoe-leather costs.
Unanticipated Inflation
Inflation that occurs at a rate higher or lower than what was expected by economic agents, leading to unexpected gains or losses for different groups.
Example:
If a loan was made assuming 2% inflation, but actual inflation turns out to be 5%, this is unanticipated inflation.
Wealth Redistribution
The shifting of economic resources and financial well-being between different groups in society, often unintentionally, due to unanticipated inflation.
Example:
When unexpected inflation benefits borrowers at the expense of lenders, it demonstrates wealth redistribution.
Workers on Fixed Incomes
Individuals whose earnings, such as pensions or disability benefits, do not adjust automatically with changes in the price level.
Example:
A retired person receiving a pension that does not increase with inflation will experience a decline in their real standard of living as prices rise, identifying them as a worker on fixed incomes.