what is the difference between expected and unexpected inflation?
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Expected inflation is the inflation component that economic agents expect to occur. It is what they have already embedded in their economic decisions. Unexpected inflation is the surprise component of inflation which people haven't incorporated in their pricing, costing, etc. Both components have different costs.
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Deflation occurs when asset and consumer prices fall over time. ... Deflation expectations make consumers wait for future lower prices. That reduces demand and slows growth. Deflation is worse than inflation because interest rates can only be lowered to zero.
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There can be a conflict between economic growth and inflation. In periods of rapid economic growth, inflation is likely to rise. However, it is possible to have both low inflation and positive economic growth – so long as the growth is sustainable and productive capacity increases at a similar rate to AD.
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Lenders are hurt by unanticipated inflation because the money they get paid back has less purchasing power than the money they loaned out. Borrowers benefit from unanticipated inflation because the money they pay back is worth less than the money they borrowed.
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TIPS Underperform Traditional Treasury Securities Functionally, Treasure inflation-protected securities (TIPS) act a lot like other Treasury bonds. ... Given this scenario, TIPS are only more likely to perform better than Treasury bonds if the stated CPI is higher than what the market anticipates.
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Inflation means the value of money will fall and purchase relatively fewer goods than previously. In summary: Inflation will hurt those who keep cash savings and workers with fixed wages. Inflation will benefit those with large debts who, with rising prices, find it easier to pay back their debts.
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Both measure the extent of price rise , however a GDP deflator does not take into account the price rise of imported goods (as GDP is the measurement of good produced by a country) while inflation takes into account the price rise of imported goods as well.
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When inflation is too high of course, it is not good for the economy or individuals. Inflation will always reduce the value of money, unless interest rates are higher than inflation. And the higher inflation gets, the less chance there is that savers will see any real return on their money.
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This is because in a world where inflation is increasing, people will spend more money because they know that it will be less valuable in the future. This causes further increases in GDP in the short term, bringing about further price increases.
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Demand-pull inflation occurs when aggregate demand within the economy increases. ... Cost-push inflation occurs when the costs of production are increased (e.g. wages or oil) and the supplier forwards those costs onto consumers.
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Anticipated inflation is an expected, predicted, steady long-term increase in general price levels. Unanticipated inflation, on the other hand, is an unstable variable inflation in the general price level that was not predicted or expected. Unanticipated inflation can be higher than anticipated inflation or lower.
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An expected value gives a quick insight into the behavior of a random variable without knowing if it is discrete or continuous. Therefore, two random variables with the same expected value can have different probability distributions.
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Thus an increase in the price level (i.e., inflation) will cause an increase in average interest rates in an economy. In contrast, a decrease in the price level (deflation) will cause a decrease in average interest rates in an economy.
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Real Rate of Return Vs. The difference is that nominal rates are not adjusted for inflation, while real rates are adjusted. As a result, nominal rates are almost always higher, except during those rare periods when deflation, or negative inflation, takes hold.
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The required rate of return represents the minimum return that must be received for an investment option to be considered. Expected return, on the other hand, is the return that the investor thinks they can generate if the investment is made.
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The link between Money Supply and Inflation. ... Increasing the money supply faster than the growth in real output will cause inflation. The reason is that there is more money chasing the same number of goods. Therefore, the increase in monetary demand causes firms to put up prices.
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Headline inflation considers the price of all the goods and services but Core inflation considers the prices of all goods and services except commodity prices( like prices of vegetables, fruits etc) and oil prices.