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Consider the following statements: 1. Inflation benefits the debtors. 2. Inflation benefits the bondholders. Which of the statements given above is/are correct?

Consider the following statements: 1. Inflation benefits the debtors. 2. Inflation benefits the bondholders. Which of the statements given above is/are correct? Correct Answer 1 only

The correct answer is 1 only.

Key Points

  • Inflation redistributes wealth from creditors to debtors i.e. lenders suffer and borrowers benefit out of inflation.
    • Bondholders have lent money (to debtor) and received a bond in return.
    • So he is a lender, he suffers (Debtor benefits from inflation).
    • Hence statement 1 is correct.
  • Statement 2 has not used specifically the word “inflation-indexed bonds”, hence we cannot say Inflation benefits the bond-holders.
    • ​Hence statement 2 is incorrect.

​​​Additional Information

  • What is Inflation?
    • Inflation refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc.
    • Inflation measures the average price change in a basket of commodities and services over time.
    • The opposite and rare fall in the price index of this basket of items is called ‘deflation’.
    • Inflation is indicative of the decrease in the purchasing power of a unit of a country’s currency. This could ultimately lead to a deceleration in economic growth.
    • However, a moderate level of inflation is required in the economy to ensure that production is promoted.
  • Who measures Inflation in India?
    • Inflation is measured by a central government authority, which is in charge of adopting measures to ensure the smooth running of the economy.
    • In India, the Ministry of Statistics and Programme Implementation measures inflation.
    • In India, inflation is primarily measured by two main indices — WPI (Wholesale Price Index) and CPI (Consumer Price Index) which measure wholesale and retail-level price changes, respectively.
    • The CPI calculates the difference in the price of commodities and services such as food, medical care, education, electronics etc, which Indian consumers buy for use.

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