10. Home reading. Read and translate the text How Does Inflation Affect?

When people go the the grocery store and see ever higher prices they know how inflation affects them. But when they are feeling more philosophical they might reason that if all wages and prices increased at the same rate it would all balance out in the end right? Well theoretically yes but in reality it never works that way. Prices of various items all increase at different rates so some people are benefiting while others suffer. Those on fixed incomes suffer the most because the cost of things they are buying increases but their income stays the same.

One side of inflation that most consumers appreciate is the fact that they can pay off their debts with "cheaper dollars".  So as you borrow the value of the money you borrowed goes down so it takes fewer hours of work to pay back the lender.

This is one reason why debt is so prevalent today. Unfortunately, this is a subtle but insidious poison because it trains us to feel good about cheating others. In the past a man's honor was tied to his ability to repay his debts but today inflation has taught us that it is good to try to cheat lenders out of their due. This has led to a higher rate of bankruptcies and if the trend continues it could lead to the breakdown of commerce.

Once lenders can't be assured of getting repaid they will stop lending (or have to charge exorbitant interest rates) and as interest rates increase the economy grinds to a halt. So even the "good" side of inflation is really "bad" for the economy in the long run.

When we first think of inflation we assume that it will affect all people equally. The fact of course is that everyone isn't affected equally. Our second assumption might be that the poor would be hurt the worst because they earn minimum wage and everything they buy is getting more expensive. However, if the minimum wage is indexed to inflation they would about break even. So interestingly if the minimum wage earners are also deep in debt inflation actually helps them. The reason for this is that debtors borrow valuable money and the number of dollars they must repay is fixed. So over time the value of the dollars they must repay is less and less (so they are easier to obtain than if the value of the dollar wasn't inflated away.) This is called repaying with "cheaper dollars".

The other big losers those on fixed incomes like the elderly and anyone whose income isn't indexed to inflation.

Inflation affects them especially hard because the prices of things they buy go up while their income stays the same. 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.

Also even though their wages may be indexed to inflation there is a time lag  since it is usually only re-indexed once a year. During this time they are on the old wages while prices for things they buy have already gone up. In a way, inflation works as a hidden tax because the government borrows money from investors. It spends this valuable money and then gets to pay back its debt with cheaper dollars.

One big disadvantage of inflation is the fact that it discourages lending (smart banks need more interest to make up for the lost value). This prices some borrowers out of the market making loans too expensive. Inflation also makes planning for the future more difficult, so businesses are less likely to take risks. No risk means no advancement which stifles the entire economy.