"Inflation that is higher than expected benefits debtors. Inflation that is lower than expected benefits creditors."(pg 192 Macroeconomics).
In order to thoroughly understand why this specific concept of inflation is true, you must first analyze the origin of inflation as well as the effects that it causes on the economy. Inflation was first noticed after the adoption of capitalism. When compared to the benefits of capitalism, it is not a huge concern. Since there is no longer a gold standard backing up the economy's currency, it is very unlikely that the currency created will ever be exactly right for the economy. Inside of this, money that is taken out of circulation one way or another is a factor in why inflation exists. Inflation can loosely be thought of as a tax on that money absent to the economy. .
The causes of inflation include several factors that put stress on the economy. Since inflation is merely a rise in overall prices, it can be caused by a demand for goods that exceeds the amount of goods supplied. That is, when the amount of money competing for available goods and services increases in an economy, the prices must also increase. The law of demand dictates this cause of inflation.
Another cause of inflation is related to the law of supply. When the cost of inputs increases in an economy, the supply reflects this by decreasing. This too can cause an overall price increase. These causes of inflation are related and can trigger each other in the case of either event.
Inflation is also affected by the money multiplying effects of debt and vice versa. This constitutes the key issue of the cited phrase. When inflation is unanticipated, or under anticipated, the effect is that the debtors, who borrow money to repay with an interest rate, are required to pay off their obligation at the set amount, of which the value of has decreased according to the rate of inflation.
