Final answer:
High inflation reduces the real value of money repaid to creditors, who receive less purchasing power than they originally provided. If inflation exceeds the fixed interest rate at which they lent out money, creditors suffer a negative real interest rate. This unintended redistribution of wealth benefits borrowers at the expense of creditors.
Step-by-step explanation:
High inflation affects creditors by diminishing the real value of the money they are paid back. When a government borrows money at a fixed interest rate and inflation rises above that rate, the purchasing power of the repaid money decreases. This means creditors, who are the suppliers of financial capital, get back less than they effectively lent out.
Consider an example where a government has borrowed at a fixed interest rate of 5%. If inflation rises above 5%, the government will be able to repay its debt using money that is worth less than when the loan was taken out, in effect repaying the debt at a negative real interest rate. This causes a redistribution of purchasing power and delivers a blow to the creditors.
Moreover, for individuals or entities who hold fixed-income investments such as bonds, the returns on these investments may not keep up with inflation. For instance, if a person's savings account earns 4% interest, but inflation rises to 5%, they are effectively experiencing a negative real interest rate, which also applies to longer-term fixed interest investments held by creditors.