Inflation is when the price of goods cost more in one year than a previous year. While periods of low inflation are beneficial for consumers, as they will not have to pay more for the same set of goods, high inflation can be beneficial for debtors. Deflation can also be detrimental to people, especially when deflation leads to a decrease in the money supply. This creates a situation in which money is scarce which decreases consumer credit.
Inflation on Debt
If the amount of debt and interest remains constant at a fixed rate, not tied to inflation, the cost of debt will decrease. As a simple example, if a period of inflation occurs wages will increase with inflation. However, since debt is not tied to inflation, higher wages will allow a person to pay the debt back faster. The general idea is a consumer is spending money when it is worth more, and paying the money back when it is worth less.
Need of Income to Rise
If income remains constant in a period of inflation, debt will become costlier. For example, if a consumer makes $1,000 a month with debt payments of $300 a month, and inflation occurs, then the cost of consumable goods will increase, tightening the budget for the consumer.
Protection Against Inflation
According to Bloomberg.com, buying commodities and paying off debt is the best way to hedge against inflation. Commodities include investments such as Vanguard's emerging market fund and oil, copper and iron ore. Most hedging strategies revolve around investments not tied to a currency.
Low Inflation and Debt
Low inflation favors people who are financially responsible. By being responsible with little debt, consumers are able to buy more while keeping a steady income.
Deflation and Debt
Deflation and debt can be hurtful for consumers. With inflation, consumers are spending money when it was worth more, and paying the money back when it is worth less. With deflation, consumers will spend the money when it is worth less and pay the money back when it is worth more.
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