Why does inflation benefit borrowers and hurt lenders? Use a local example to explain.
Answer (1)
Inflation benefits borrowers and hurts lenders because it reduces the real value of money over time. When someone borrows money, they promise to pay it back in the future. If inflation happens, the money they return is worth less in purchasing power than when they borrowed it. This means they repay their debt with money that cannot buy as much as before, making it easier for borrowers but unfair for lenders.Let’s look at an example. Suppose Juan borrowed ₱100,000 from a bank to buy farm equipment in 2020, with an interest rate of 5% and plans to repay in two years. At that time, the inflation rate was expected to be 2%. The bank thought that, with interest, they would earn a 3% “real return” after accounting for inflation. But suppose inflation actually turns out to be 6% due to rising fuel and food prices in the Philippines. That means the bank loses because the 5% interest doesn’t make up for the higher cost of living. The money Juan repays is worth less than expected.Juan benefits because the money he borrowed in 2020 had more value. He used it to buy equipment when prices were lower. By the time he repays the bank, his farm income may have increased (because food prices rose), but he’s repaying with pesos that are worth less.This is why inflation is sometimes called a "hidden tax on savers and lenders". They expect a return based on stable value, but inflation erodes that value. In contrast, borrowers gain if inflation is higher than expected.To avoid this, banks like those in the Philippines now watch inflation forecasts closely and adjust their interest rates accordingly. Some loans even include inflation-adjusted rates to protect lenders from unexpected inflation.
