Final answer:
The expectation of higher inflation would lead to demands for higher wages and adjustments in contracts. Individuals with COLA wage contracts would be protected, whereas those with cash savings or fixed-interest loans would likely suffer a loss in real value.
Step-by-step explanation:
If workers expect inflation to rise from 3% to 5% next year, all else equal, we would predict that there should be an impact on wage negotiations and contract adjustments. Workers and unions are likely to seek higher wage increases to compensate for the expected rise in the cost of living. Someone with a wage contract that includes a Cost of Living Adjustment (COLA) would be helped, as their wages will automatically adjust to the higher inflation rate. On the other hand, individuals with cash savings or fixed-income investments might be hurt because the real value of their money would decline as inflation erodes purchasing power. A bank with money lent out at a fixed interest rate would also be negatively affected, as the real value of the repayments would be lower. A person not scheduled for a pay raise within the inflation period would be hurt too, as their purchasing power would decrease.