Question

Most people in Canada have grown accustomed to a modest inflation rate of around 2%. Who would gain and who would lose if inflation unexpectedly came to a complete stop over the next 15 or 20 years?

Answer 1

If inflation stopped in Canada, beneficiaries would include individuals with fixed incomes or cash savings and creditors, while debtors and businesses could be disadvantaged. The lack of inflation could hinder economic growth and make long-term planning more difficult.

Step-by-step explanation:

If inflation in Canada unexpectedly stopped over the next 15 to 20 years, the impacts would be mixed. Those who would gain are individuals with fixed incomes or cash savings, as the purchasing power of their money would remain consistent. Creditors who lend money at fixed interest rates would also benefit since the real value of the repayments from borrowers would not diminish over time.

Conversely, debtors, such as individuals with long-term loans, would lose because they would be repaying their debts with money that's more valuable than anticipated. Businesses might suffer from reduced flexibility in adjusting real wages to changes in productivity or demand. In addition, long-term economic planning could become more challenging since expected inflation is often used as a cushion for future forecasting.

While low inflation is often seen as a positive economic sign, complete stagnation can also indicate a lack of economic growth, which could harm employment and investment. Economic innovation and improvements may slow down without the spur of mild inflation. Therefore, a balance must be struck to maintain a healthy economy without disruptive inflation or deflation.