LYCOS RETRIEVER 
Inflation: Deflation
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Inflation and deflation are both far-reaching titanic forces that spread out and greatly influence returns across all major financial markets. The outcome of the inflation or deflation question is crucial for stock investors, bond investors, real-estate investors, and gold investors. Some investment classes tend to do well in inflationary environments (gold and silver), others tend to shine in deflationary times (cash and bonds), and still others tend not to thrive in either extreme environment (general stocks).
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It is sometimes argued that inflation is good for debtors and bad for creditors, and bad for persons on fixed incomes. A debtor, so goes the argument, benefits from inflation because loans are taken out in today's dollars, but repaid in the future when, because of inflation, a dollar will be worth less than today. However, to the extent that inflation is correctly anticipated—or "rationally expected"—the rate of interest charged for the loan—the "nominal" rate—will be the "real" rate of interest plus the expected rate of inflation. More generally, any fixed income contract expressed in nominal terms can be negotiated in advance to take proper account of expected inflation. However, if inflation or deflation is unanticipated, it can have severe distributional effects. During the Great Depression millions of Americans lost their homes because their incomes fell drastically relative to their mortgage payments.
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Before exploring some of the causes of grade inflation mentioned in the literature, it is important to define grade inflation. The most obvious definition is that grade patterns change so that the overwhelming majority of students in a class, college, or university receive higher grades for the same quantity and quality of work done by students in the past. A corollary to this definition is the same GPA obtained by students with poorer academic skill (as measured by the SAT or ACT exams). Another less well known version of grade inflation is "content deflation" where students receive the same grades as students in the past but with less work required and less learning. [2]
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If inflation occurs throughout the life of the security, each interest payment will be greater than the previous one. If deflation occurs the inflation-adjusted principal will adjust downward and the interest payments will be less than if inflation occurred. At maturity, the investor will receive the greater of either the inflation-adjusted principal or the original face value.
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Still, the absolute level of inflation may be less important than its volatility. Inflation targeting - the latest fad among central bankers - aims to curb inflationary expectations by implementing a consistent and credible anti-inflationary as well as anti-deflationary policy administered by a trusted and impartial institution, the central bank.
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