Borrowing and Lending during periods of inflation
According to numerous economists, prolonged effects of inflation is dependent on the money supply. This means that the supply of money is directly proportional to price levels in the long-term. For this reason, a hike in circulating currency causes a proportional increase in the prices of available goods and services supplied. While giving credit to borrowers, all creditors put into consideration prevailing interest rates as well as expected inflation. This is incorporated in terms of loan repayment and is done to ensure the purchasing power of money does not change (Hubbard, 2019).
During such moments, unexpected rising inflation may occur. The rising inflation triggers a rise in both wages and prices. It is worth noting that the contract of repaying the borrowed loans remains constant and does not change with the unexpected rising inflation. This means that the income of the borrowers rises while the cost of repaying the borrowed loans remain the same. For this reason, borrowers find it cheaper to pay the loans during periods of unexpected rising inflation. This explains why I would prefer to be a borrower during such periods and not during periods of unexpected declining inflation. In another perspective, entities borrow money and use the cash earned later to pay the loans. With rising inflation, the value of the currency declines over time. This makes borrowers pay the loans with money that is worth less than it was during period of borrowing. During periods of unexpected declining inflation, I would rather be a lender because the real value of given debts is greatly increased. During such period, lenders benefit because during repayment of loans, the cash as more value. In conclusion, periods of unexpected rising inflation have a tendency of transferring wealth from creditors to debtors in society. Wealth is also transferred from the rich in the community to the poor.
Reference
Hubbard, Glenn R. and O’Brien, Anthony Patrick. Essentials of Economics. 6th ed. New York, NY: Pearson, 2019.