Final answer:
Unexpected inflation typically hurts savers and those with fixed incomes, as it decreases their purchasing power, while benefiting borrowers who repay debts with less valuable dollars. Inflation can cause redistributions of purchasing power, affecting individuals and businesses differently depending on their financial positions.
Step-by-step explanation:
In the case of unanticipated inflation, where the actual inflation rate is higher than expected, certain groups are affected differently. Individuals and businesses holding cash or receiving payments fixed in nominal terms, like certain wages and interest payments, tend to be worse off as their purchasing power decreases. On the other hand, debtors with fixed-rate loans benefit, as they repay their debts with money that has lesser value. Hence, unexpected inflation can redistribute purchasing power, favoring borrowers over lenders and spenders over savers.
As an example, consider someone with a savings account earning 4% interest. If inflation unexpectedly rises to 5%, the real rate of return on that account becomes negative, effectively eroding the saver's purchasing power. Conversely, someone with a fixed-rate loan at 9% would gain if inflation increased to the same rate, since the real interest rate on the loan would be zero—effectively making it cheaper to pay back the borrowed funds.