Effects of inflation on bond holders vs equity holders
1. Bond holders: Those who invest in debentures, securities, bonds, etc. which carry a fixed interest rate lose during inflation because they receive a fixed sum while the purchasing power is falling. Thus, any person who is earning a fixed income is at loss when there is an inflationary pressure. For example, salaried people, senior citizens etc.
2. Equity holders: Those who hold shares or stocks of companies gain during inflation because when prices are rising, business activities expand which increase profits of companies. As profits increase, dividends on equities also increase at a faster rate than prices.
Other effects of inflation
1. On exchange rate: Inflation may lower the purchasing power of the local currency which may also affect the exchange rates. The local currency may depreciate in case of higher inflation in the domestic market.
2. On Fiscal Deficit: Higher inflation may lead to higher borrowing cost for the government since inflation tightens the yield curve which negatively impacts the government borrowing programme as bondholders demand inflation premium on fresh issue.
3. On savings rate: Higher inflation erodes the purchasing power of common people. This forces people to dive into their savings and thus, inflation lowers the savings rate in the economy.
Spread the Word