I want you to imagine for a minute several people in your neighborhood, each of whom is invited to a neighborhood block party. This neighborhood block party is going to happen in a few hours. So here's a description of your neighbors:
Alyson is a retired woman living on Social Security payments.
Lydia is a neighbor who works on an assembly line in a car factory.
Frank is a farmer who just bought a tractor for his farm, which is next to his house.
Davis is a neighbor who just closed a 30-year, fixed-rate mortgage on his new home.
Let's say that last year the inflation rate was 3%. People are expecting this year to be 3% also. However, an hour ago, each of these neighbors discovers, while watching the national news on television, that inflation is actually 5% - it's not 3% like everyone expected, it's 5%. As you watch the same news report on television, you begin to ask yourself the question: which one of your neighbors is going to be happy at the party?
Let's look at this from an economic perspective. What we want to know is: what are the effects of inflation on suppliers and demanders? Another way to say this is: who gets hurt and who gets helped by unanticipated, or unexpected, inflation? Anticipated inflation is a sustained rise in the price level that is expected ahead of time. Inflation that is anticipated, or expected, isn't as bad as unanticipated inflation, which is a higher-than-expected sustained increase in the price level. When inflation is expected, it gets included in the price of goods and services today, as well as the interest rates on loans and various investments. Anticipated inflation benefits anyone whose income is tied to inflation. An example of this would be workers with ongoing cost-of-living adjustments that are tied to inflation.