Question

Does inflation affect everyone the same? Given an inflation rate of 6%, indicate whether each of the following would lose or gain purchasing power or experience no change:

• You have a fixed rate mortgage at 4%

• You are a retiree living on a fixed pension income

• You are a social security recipient

• You are a retiree living on income from a 401K that averages a 9% annual rate of return

• You are a member of a union that has negotiated a COLA in your contract

• You receive a 3% raise in your wages

• You are paying off a loan you received at 5% interest

• You are a minimum wage worker

Answer 1

1. Gain purchasing power (as the money to be paid back to lender reduces in value)

2. Lose purchasing power (as real value of pension falls)

3. Indifferent (as social security payments are always indexed for inflation)

4. Gain purchasing power (as real value is still positive as inflation is less than market return)

5. Indifferent (as real wages remain in sync with inflation)

6. Lose purchasing power (as inflation exceeds nominal increase in wages)

7. Gain purchasing power (as real value of money to be paid off falls)

8. Lose purchasing power (as real wages fall due to inflation)