What are the effects of unexpected inflation on borrowers, savers, and people with fixed incomes?
Answer (1)
Unexpected inflation affects different people in different ways, and it often creates winners and losers in the economy.Borrowers usually benefit from unexpected inflation. When someone borrows money at a fixed interest rate, they agree to pay it back with future money. If prices go up unexpectedly, that future money becomes less valuable. So the real cost of the loan becomes cheaper. For example, if a student takes a ₱50,000 loan at 5% interest expecting inflation to stay low, but inflation suddenly rises to 8%, the bank loses and the student wins because they are paying back money that’s worth less than before.Savers, on the other hand, lose during unexpected inflation. If someone puts money in a bank at 3% interest, but inflation suddenly jumps to 6%, their real purchasing power drops. They earn money in interest, but it isn’t enough to keep up with the rise in prices. In the Philippines, senior citizens who rely on small savings or pensions are often hurt by this. Their savings buy less and less each month.People with fixed incomes, such as retirees or employees whose salaries don’t adjust quickly, also suffer during unexpected inflation. For example, a government employee with a fixed monthly salary might find that their income doesn’t cover the rising cost of food, rent, or medicine. Their quality of life declines unless their income is adjusted (through COLA or salary increase), which often happens too slowly.In conclusion, unexpected inflation helps borrowers but hurts savers and people on fixed incomes. This is why inflation targeting by the BSP is important—when inflation is stable and predictable, people can plan better, and the economy remains fair for all.
