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8 May, 2015 - 11:17

The effect of inflation (if it is not anticipated) is to redistribute wealth and income from savers and those on fixed income to debtors and those on variable income. This happens because the purchasing power of a fixed money amount decreases, and because borrowers repay lenders their debt in cheaper dollars.

A borrower who pays an interest rate lower than the inflation rate, is in fact paying back less in purchasing power to the lender than what he had borrowed. The borrower gains and the lender loses as long as the interest rate is not adjusted for the rate of inflation.