Anticipated vs. Unanticipated Inflation

ANTICIPATED VS. UNANTICIPATED INFLATION 3

Anticipatedvs. Unanticipated Inflation

Inflationrefers to the sustained increase in price levels for both servicesand goods. It can be anticipated or unanticipated. Anticipatedinflation occurs when businesses and people are aware of inflation sothat they take necessary precautions to protect themselves from itsimpacts. This means that anticipated inflation has little or noimpacts on the economy as people are already prepared. For instance,companies prepare by increasing their prices, banks increase theirrates of interest, and workers may ask for pay increase. Householdsmay also switch their savings into accounts that offer higherinterest rates or into other valuable assets such as houses. Suchplan ensures that the economy will run without much disruption(Colander &amp Gamber, 2006).

McEachern(2012) stipulates that unanticipated inflation occurs when people andbusinesses make mistakes in predicting the rate of inflation. Wheninflation is unstable and changes year to year, it becomes quitedifficult for businesses and people to forecast the rate of inflationin the future. In this case, they are not prepared against theimpacts of inflation. Usually, there are losers and gainers withregard to purchasing power culminating from inflation. Losers areindividuals on fixed incomes, retirees, and creditors who have to paytheir loans using dollars that has reduced purchasing powers.Gainers, on the other hand, are individuals whose incomes increasefaster than the rate of inflation. Likewise, debtors who pay theirdebts using dollars with a reduced purchasing power also gain fromunanticipated inflation.

Thetwo types of inflation have differing effects on the agents ofeconomy. Whereas anticipated is planned for and has minimal effectson the economy, unanticipated is unplanned and disrupts the economyin various ways.

References

Colander,D. C., &amp Gamber, E. (2006). Macroeconomics.Cape Town: Pearson/Prentice Hall.

McEachern,W. A. (2012). Economics: A contemporary introduction. Mason, OH:South-Western Cengage Learning.