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 Unanticipated & Anticipated Inflation

Unanticipated inflation:
An unexpected decrease in the purchasing power of (real value of) currency.

Effects:
  • Long-term contracts of fixed future payments decrease in value.
  • Decreases the value of a fixed-payment mortgage held by a bank
  • Gains and losses in the labor market:

        Real value of the wages decreases

        Gain for employers at the expense of employees

  • Even when inflation rates are correctly anticipated, it has adverse effects.
  • Higher transaction costs: Time & effects diverted from producing activity reduces real GDP.
  • Tax effects: Real after tax returns on investment are distorted by inflation

 

Phillips Curve
 


SR Phillips curve intersects the LR Phillips curve at the expected rate of inflation.

 

Demand Pull & Cost Push Inflation



Demand Pull Inflation 

 



Cost Pull Inflation 


 





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