Unanticipated Inflation: Definition & Overview Video

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  • 0:01 What Is Unanticipated…
  • 1:21 Positive and Negative Effects
  • 2:30 Example
  • 3:11 Lesson Summary
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Lesson Transcript
Instructor: Brianna Whiting
In this lesson, you'll learn about unanticipated inflation. Take a look at the positive and negative effects associated with it, who it affects, as well as a real life example.

What Is Unanticipated Inflation?

As a consumer, we are all aware that goods have a price that we are expected to pay in order to receive them. While we are always looking for a great deal, what would happen if there was not a deal to be found because the general level for the price of goods kept increasing? Would you buy the goods anyway, or would you wait to purchase the goods? This is the general concept for inflation, and when this happens unexpectedly, it is known as unanticipated inflation.

So you may be asking yourself, what exactly is inflation, and does inflation always occur unexpectedly? First, inflation is an increase in the general price level of goods that continues to increase. Second, inflation does not always happen unexpectedly. In fact, inflation can be both unanticipated and anticipated. However, in order to fully understand unanticipated inflation, we must differentiate it from anticipated inflation.

Anticipated inflation occurs when people know inflation is going to occur and prepare for it. For example, increased interest rates; if inflation is anticipated, banks can try and protect themselves by increasing the interest rates. Unanticipated inflation occurs when people do not know inflation is going to occur until after the general price level increases. When this happens, many individuals are left unprotected, such as lenders who get paid back with a money that has a reduced purchasing power.

Positive and Negative Effects

Now that we know what unanticipated inflation is and how it differs from anticipated inflation, let's look at the effects.

Negative Effects

When inflation occurs unexpectedly, those on a fixed income, such as retired individuals, often encounter losses. Because those on a fixed income don't, or can't, get an increase in their pay, the money they do receive is often not enough to live on or cover expenses since a dollar now has less value. Banks who give out loans also become negatively affected because they get paid back with a dollar that has a lower purchasing power.

Positive Effects

Those that benefit from unanticipated inflation are employees with increasing income and individuals with debt. Unlike banks, debtors paying with a dollar that has a decreased purchasing power, save money on their loans.

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