In simple terms, the word 'Inflation' refers to a growth or increase in money supply.

As one of the important economic concepts, the effects of inflation exert impact both in the economic and social spheres of a nation and on its inhabitants.
Effects of Inflation:

Inflation affects both the economy of a country and its social conditions, as well as the political and moral lives of its inhabitants. However, the economic effects of Inflation are stated and described below:
Price inflation has immense effect on the Time Value of Money (TVM). This acts as a principal component of the rates of interest, which forms the basis of all TVM calculations. The real or estimated changes occurring in the rates of inflation lead to changes in the rates of interest as well. Inflation exerts impact on the treasury of a nation as well. In United States of America, Treasury Inflation-protected Securities (TIPS) ensures safety to the American government, assuring the public that they will get back their money. However, the rates of interest charged by TIPS are less compared to the standard Treasury notes. The most immediate effect of inflation is the decrease in the purchasing power of dollar and its depreciation. Inflation influences the investments of a country. The Inflation-protected Securities (IPSs) may act as a guard against the loss in the purchasing power of the fixedincome investments (like fixed allowances and bonds), which may occur during inflation. Inflation changes the allocation of income. This exerts maximum effect on the lenders than the borrowers at the time of persisting inflation, because the loans sanctioned previously are paid back later in the form of inflated dollars.

Inflation leads to a handful of the consumers in making extensive speculation, to derive advantage of the high price levels. Since some of the purchases are high-risk investments, they result in diversion of the expenditures from regular channels, giving birth to a few structural unemployments

Inflation and Interest rate

Interest and inflation are key to investing decisions, since they have a direct impact on the investment yield. When prices rise, the same unit of a currency is able to buy less. A sustained deterioration in the purchasing power of money is called inflation. Investors aim to preserve the value of their money by opting for investments that generate yields higher than the rate of inflation. In most developed economies, banks try to keep the interest rates on savings accounts equal to the inflation rate. However, when the inflation rate rises, companies or governments issuing debt instruments would need to lure investors with a higher interest rate.

The Relationship between Interest and Inflation

Inflation is an autonomous occurrence that is impacted by money supply in an economy. Central governments use the interest rate to control money supply and, consequently, the inflation rate. When interest rates are high, it becomes more expensive to borrow money and savings become attractive. When interest rates are low, banks are able to lend more, resulting in an increased supply of money. Alteration in the rate of interest can be used to control inflation by controlling the supply of money in the following ways:

A high interest rate influences spending patterns and shifts consumers and businesses A rise in interest rates boosts the return on savings in building societies and banks.

from borrowing to saving mode. This influences money supply. Low interest rates encourage investments in shares. Thus, the rate of interest can impact the holding of particular assets.

A rise in the interest rate in a particular country fuels the inflow of funds. Investors

with funds in other countries now see investment in this country as a more profitable option than before.

Inflation and Interest Rates: Effect on the Time Value of Money

Inflation has a significant impact on the time value of money (TVM). Changes in the inflation rate (whether anticipated or actual) result in changes in the rates of interest. Banks and companies anticipate the erosion of the value of money due to inflation over the term of the debt instruments they offer. To compensate for this loss, they increase the interest rates.The central bank of a country alters interest rates with the broader purpose of stabilizing the national economy. Investors need to keep a close watch on interest and inflation to ensure that the value of their money increases over time.

Inflation and Economic Condition

Inflation is a condition, when cost of services coupled with goods rise and the entire economy seems to go haywire. Inflation has never done good to the economy. However, whenever there is expected inflation, governments around the world take appropriate steps to minimize the ill effects of inflation to a certain extent. Inflation and economic growth are parallel lines and can never meet. Inflation reduces the value of money and makes it difficult for the common people. Inflation and economic growth are incompatible because the former affects all sectors as indicated by:
CPI or Consumer Price Index
A rise in the CPI indicates inflation. The CPI or the consumer price index is used as an index for salaries, wages, contracted prices, pensions. This is done to adjust with the inflation effects. It is an important economic indicator.

GDP or Gross Domestic Product

The gross domestic product is another important economic indicator and is usually inflation adjusted. This is an important tool for measuring the rate of inflation. The important segments, which are hampered include: Investment Interest rates Exchange rates Unemployment Stocks Various monetary policies Various fiscal policies

The effect of inflation and economic growth is manifested in the following cases: I) Investment:

If the price of goods increases and people have to compensate for the increase in price, they usually make use of their savings. In the event when savings are depleted, fund for investment is no longer available. An individual tends to invest, only if savings of an individual is strong and has sufficient money to meet his daily needs. II) Interest rates: Whenever inflation reigns supreme, it is a well known fact that the value of money goes down. This leads to decline in the purchasing power. In the event, when the rate of inflation is high, the interest rates also rise. With increase in both parameters, cost of goods will not remain the same and consequently people will have to shell out more money for the same goods. III) Exchange rates: Inflation and economic growth are affected by exchange rates as well. Exchange rates denote the value of money prevailing in different countries. High rate of inflation causes severe fluctuations in exchange rates. This adversely affects trade (export and import), important business transaction across borders, value of money also changes. IV) Unemployment: Growth of a nation depends to a large extent on employment. If rate of inflation is high, unemployment rate is low and vice versa. This theory is propounded by economist William Philips and this gave rise to the Philips Curve. V) Stocks: The returns a company offer, on investment fully depend on the performance of the company. Past performance, current position of the company and future trends decide how much(money, in form of bonus or dividend) is to be returned to the investors. Owing to inflation, several monetary as well as fiscal policies are impacted. Conclusion: In reality, low inflation rate and an upward economic growth is never possible. Nevertheless, low inflation rate means slow economic growth. Whenever, money is in excess, there is bidding by the consumers due to which the cost of goods escalate.

Inflation. Inflation means a persistent rise in the price levels of commodities and services, leading to a fall in the currencys purchasing power. The problem of inflation used to be confined to national boundaries, and was caused by domestic money supply and price rises. In this era of globalization, the effect of economic inflation crosses borders and percolates to both developing and developed nations.
Central bankers believe that mild inflation, in the 1 to 2 per cent range, is the most benign for a countrys economy. High inflation, stagflation or deflation are all considered to be serious economic threats.

What Will Cause Inflation?

The following factors can lead to inflation:

Printing too much money. This is called a loose or expansionary monetary policy. If

there is a lot of money going around, then supply is plentiful compared to the products you can buy with that money. The law of supply and demand therefore dictatesthat prices will rise.

Increases in production costs. Tax rises. Declines in exchange rates. Decreases in the availability of limited resources such as food or oil. War or other events causing instability.

Economists generally believe that money supply is the key cause of inflation; in 2008, however, skyrocketing prices of oil, food and steel caused runaway levels of inflation in the world economy that collapsed only because of the global Financial Crisis.

Effects of Inflation
One of the economic effects of inflation is the change in the marginal cost of producing money. This involves the appropriate 'price' of money which, in this case, is the nominal rate of interest. This 'price' indicates the return which has to bepre-determined to hold back the printing presses, in place of some other assets which offer the market interest rate.

In addition, if a country has a higher rate of inflation than other countries, its balance of trade is likely to move in an unfavorable direction. This is because there is a decline in its price competitiveness in the global market. A high rate of inflation can cause the following economic impediments: The value of investments are destroyed over time.

It is economically disastrous for lenders. Arbitrary governmental control of the economy to control inflation can restrain Non-uniform inflation can lead to heavy competition in the global market and threaten High levels of inflation tend to lead to economic stagnation.

economic development of the country. the existence of small economies.

Measures to Control Inflation

The central banks, monetary authorities or finance ministries of most nations have the authority to take economic measures to control rising inflation by regulating the following factors: Reducing the central bank interest rates and increasing bank interest rates.

Regulating fixed exchange rates of the domestic currency. Controlling prices and wages. Providing cost of living allowance to citizens in order to create demand in the market.

Different schools of thought emphasize different factors as the root cause of inflation. However, there is a consensus on theview that economic inflation is caused either by an increase in the money supply or a decrease in the quantity of goods being supplied, and that the effects of either high inflation or deflation are extremely damaging to the economy.

Cause of Inflation

A sustained rise in the prices of commodities that leads to a fall in the purchasing power of a nation is called inflation. Although inflation is part of the normal economic phenomena of any country, any increase in inflation above a predetermined level is a cause of concern.

High levels of inflation distort economic performance, making it mandatory to identify the causing factors. Several internal and external factors, such as the printing of more money by the government, a rise in production and labor costs, high lending levels, a drop in the exchange rate, increased taxes or wars, can cause inflation.

Different schools of thought provide different views on what actually causes inflation. However, there is a general agreement amongst economists that economic inflation may be caused by either an increase in the money supply or a decrease in the quantity of goods being supplied.The proponents of the Demand Pull theory attribute a rise in prices to an increase in demand in excess of the supplies available. An increase in the quantity of money in circulation relative to the ability of the economy to supply leads to increased demand, thereby fuelling prices. The case is of too much money chasing too few goods. An increase in demand could also be a result of declining interest rates, a cut in tax rates or increased consumer confidence. The Cost Push theory, on the other hand, states that inflation occurs when the cost of producing rises and the increase is passed on to consumers. The cost of production can rise because of rising labor costs or when the producing firm is a monopoly or oligopoly and raises prices, cost of imported raw material rises due to exchange rate changes, and external factors, such as natural calamities or an increase in the economic power of a certain

country. An increase in indirect taxes can also lead to increased production costs. A classic example of cost-push or supply-shock inflation is the oil crisis that occurred in the 1970s, after the OPEC raised oil prices. The US saw double digit inflation levels during this period. Since oil is used in every industry, a sharp rise in the price of oil leads to an increase in the prices of all commodities. While money growth is considered to be a principal long-term determinant of inflation, non-monetary sources, such as an increase in commodity prices, have played a key role in triggering inflation in the past four decades. Inflation has become a major concern worldwide in 2008, with global prices rises in oil, food, steel and other commodities being the culprit.

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