This movement of readjustment would not go on indefinitely, even if the same trend of prices continued; for in the strict theory of the case the adjustment would be complete when the interest rate had changed by just the amount of the annual change in the level of prices.

For example, if 5 per cent is the static normal rate of interest, then when prices are falling 1 per cent each year, the adjusted rate of interest would be 4 per cent; and when prices were rising 1 per cent each year, the adjusted rate of interest would be 6 per cent.

Such adjustments serve to some extent to neutralize the effects of changes in the standard of deferred payments so far as concerns new loans made in view of just such a change and in expectation of its continuance.
But no one can foresee exactly, and most persons take little account of, such a change until it has continued for several years in the same direction.

The adjustment is therefore never very prompt or very exact.

In some years the general level of prices has risen more than 5 per cent, or more than enough to offset the entire interest received by most lenders.