HOUSEHOLDS - WINNERS

HOUSEHOLDS - LOSERS

Borrowers: Through leveraging the principal reduces in real terms. Also borrowers can take advantage of prices before they rise.

Savers: Real value of savings decline. Prices rise faster than savings can accumulate.

Households with property - Holders of real wealth: the value of assets such as houses tend to keep pace with inflation

Holders of monetary wealth: real value of savings declines.

Incomes that rise faster than inflation: those with skills are in high demand or who are members of a strong union may be able to demand large pay increases.

Incomes that rise more slowly than inflation: Those with little bargaining power or on fixed incomes, will tend to find real incomes falling. Purchasing power falls.

Households who speculate (e.g. buy property) gain income.

Inequality increases. Income distribution becomes more unequal.

Fiscal Drag reduces disposable income.

FIRMS

FIRMS

Firms trading domestically: these are more able to pass costs onto the consumer.

Firms trading internationally: if our inflation rate is high, overseas competitors gain cost advantages.

Investment loans are cheaper as real amount borrowed falls.

Investment is more expensive as interest rates increase.

Why firms prefer a stable environment.

• Resources allocated efficiently.
• Plan for future with confidence.
• Exports stay price competitive.
• Costs and prices stay constant.
• NZ$ stays constant.

Market signals are distorted as investors speculate.

Difficult to plan for future.

Costs of production increase as nominal wages rise.

NZ exports become less competitive.

IMPACTS ON EXPORTERS

IMPACTS ON IMPORTERS

If the inflation rate in NZ is higher than that of our trading partners then NZ exporters costs of production rise so prices rise and exports become less competitive in overseas markets.

Imports become relatively cheaper than NZ made goods if our inflation rate is higher than our trading partners, so imports increase.

As exports decrease, export receipts decrease and exporters sales and profits fall.

As imports rise, import payments rise and less is spent on NZ made goods.

Exporters have to become more efficient, lay off staff or add value to their products.

As a result importers sales and profits increase and so they may employ more workers, increase investment level etc.