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IAI Actuarial Core Principles · Business Economics · Impact of the macroeconomic environment on business

In a period of unexpected high inflation, which group is most likely to gain in real terms?

Borrowers with fixed-rate loans gain from unexpected inflation because they repay in money that has lost purchasing power. Pensioners, savers, bondholders and workers on fixed nominal contracts all hold fixed nominal claims or incomes, so their real value falls.

  1. APensioners receiving a fixed nominal pension
  2. BSavers holding fixed-rate deposits at a rate below inflation
  3. CBorrowers who took fixed-rate loans before the inflation riseCorrect
  4. DLenders holding long-dated fixed-coupon bonds
  5. Workers on multi-year fixed nominal wage contracts

Explanation

Unexpected inflation erodes the real value of fixed nominal obligations. Borrowers with fixed-rate loans repay in money worth less than what they borrowed, so they gain. The other groups hold fixed nominal claims or incomes and lose purchasing power.

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