This question boils down into the interesting inquiry about whether inflation is a problem for me, as borrower or lender. In general, positive economic trends, including those associated with inflation, can be beneficial. The inflation premiums that are earned by borrowers as a result of unexpected economic shifts can lead to profitability. When the price of goods or services rises and purchasing power falls, this is called inflation. Lee (2013). The purchasing power of a currency is how much money one can spend on goods and services. Lenders and borrowers may both benefit from inflation depending on economic conditions. Lending during low inflation or borrowing in times of unanticipated inflation could mean that I repay the lenders with less money than what I borrowed. Inflation is good for both the winners and the losers. Surprisedly, inflation can be beneficial to both winners and losers. If someone owes money to me and there is unanticipated inflation, they will give me currency that is less valuable than the original one. To compensate the lender for any loss, the nominal interest will be added to the adjustments of the borrowers’ accounts. This helps retain buying power in inflation. This is to cover inflation surcharges. It’s equal to the predicted inflation amount by the lender. The loan might not be returned if the inflation rate unexpectedly increases. To compensate for inflation, the borrower must also pay very low interest rates. It will therefore be more advantageous for a borrower to have low interest rates during unpredictable inflationary rises. Inflation drops and the lender receives a higher premium than is necessary to compensate for it. In response to a drop in inflation, the lender doesn’t adjust its interest rate. This results in higher premium payments than expected. It is better to be an investor than borrower when inflation drops suddenly. Unexpected inflation can be more damaging to lenders because the money received has lower purchasing power than that which they borrowed. Because the money that they get back is less valuable than what they borrowed, unanticipated inflation can benefit debtors. If inflation has an effect on wages, then I as the borrower will only make a profit if that inflation increases (Hubbard, 2012). The reason is that although the obligations to the borrower remain the same, I have enough funds to pay back the loan. It may prove difficult to obtain loans or borrow money from financial institutions during periods of high inflation. Because the lender may not be able to pay the loan back, the cash flow of the business could be at risk. As a lender I might consider raising the interest rate in this situation to increase market uncertainty and prevent inflation. Lenders and borrowers may experience delays due to inflation. Both borrowers and lenders can plan for the unexpected by anticipating future outcomes and considering market factors.
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