'Inflation premium' is defined here as the higher return that investors demand in exchange for investing in a long-term security, where inflation has a greater potential to reduce the real return.

In another book, I saw inflation premium being defined as the bonus brought by inflation to the borrowers.

Both these ideas are contradicting, as the first one implies inflation premium is a compensation for investors, while the second one claims it is a compensation for borrowers, considering the rise in price levels.

Which one is correct?


1 Answer 1


The article you linked is correct, inflation premium is the extra return people get as a compensation for taking the inflation risk.

However, inflation does benefit borrowers but this is not called inflation premium. Perhaps the book you read was mistranslated, or author made an error, unless you share the reference it is hard to say.

  • $\begingroup$ [link] books.google.co.in/…) - This is the link to the book I'm referring to. $\endgroup$ Sep 8, 2021 at 6:50
  • $\begingroup$ Check the 1st paragraph under the topic 'inflation premium'. $\endgroup$ Sep 8, 2021 at 6:51
  • $\begingroup$ @Curiouserandcuriouser well the book is simply wrong, I mean this is not some sort of top tier economics textbook, its from unknown economist, and these sort of off brand textbooks are typically of lower quality $\endgroup$
    – 1muflon1
    Sep 10, 2021 at 16:07
  • 1
    $\begingroup$ Yeah, figured it out. Even had an argument with the author, although he never conceded his mistake. Thanks, anyway! $\endgroup$ Sep 11, 2021 at 17:28

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