What is inflation tax?

Inflation tax refers to the loss of purchasing power that occurs when inflation rises, effectively acting as a hidden tax on individuals and businesses. As prices increase, the real value of money decreases, meaning that the same amount of money buys fewer goods and services. This phenomenon disproportionately affects those with fixed incomes or savings, as their wealth erodes over time without corresponding increases in income. Ultimately, inflation tax can lead to a redistribution of wealth, benefiting borrowers while disadvantaging savers.