The Costs of Inflation

Expected inflation is the level of inflation that economic agents expect in the future.

Unexpected inflation is the level of inflation that we experience that is either below or above that which we expected; it is the component of inflation that is a surprise.

Expected inflation can give rise to:

menu costs and

shoe leather costs.

Unanticipated (unexpected) inflation can in addition:

lead to inequitable transfers of wealth between borrowers and lenders (including losses to savings);

give rise to risk premia in borrowing rates and the prices of other assets; and

reduce the information content of market prices.