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How do anticipated and unanticipated inflation differ in their economic agents?

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armyof32000 | (Level 1) Salutatorian

Posted July 22, 2013 at 5:45 AM via web

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How do anticipated and unanticipated inflation differ in their economic agents?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted July 22, 2013 at 12:21 PM (Answer #1)

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Unanticipated inflation has much more serious effects on economic agents.  It is much worse for an economy.

Inflation can be anticipated or unanticipated.  As the names suggest, anticipated inflation is inflation that people expect.  If people do not expect inflation and it occurs, that is unanticipated inflation. 

Anticipated inflation is not much of a problem for an economy.  If people know that inflation is coming, they can plan for it.  Employees can ask for raises for the coming year.  Banks will know to raise interest rates so that they can maintain their real rates of return.  This planning means that economic activity can continue without serious interruption.

By contrast, if unanticipated inflation occurs, there will be problems.  In general, what will happen is that some people will be hurt economically.  For example, if banks have not raised interest rates and inflation occurs, they will have a lower real rate of return.  The money that is used to pay back loans will not be worth as much as the bank thought it would be.  If things get bad enough, banks will be reluctant to lend because they will not know what interest rates they need to charge.

These two types of inflation differ in their impacts because economic actors can plan for anticipated inflation but cannot do the same for unanticipated inflation.

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