Question

Explain why inflation leads to arbitrary redistribution of wealth.

Answer 1

The inflation will not always expected. If an unexpected inflation arises, it would cause an arbitrary redistribution of wealth from creditors to debtors (i.e. lenders to borrowers) or vice-a-versa. Debtors have an advantage from inflation as they repay their creditors with dollars that would be now worth less in terms of purchasing power because inflation erodes the purchasing power. The inflation also causes the sudden revaluations of financial assets. The weakest groups in the society generally suffer the most due to the inflation because they have only limited possibilities for hedging against it.