WHAT IS INFLATION IN ECONOMY?

Inflation

It refers to continuous rise in the prices of goods and services leading to decline in the purchasing capacity of a country's currency. Because of inflation as the purchasing capacity of the currency comes down to zero that currency will be withdrawn from circulation.

What is Impact from Inflation?

Inflation adversely affects our savings. It affects poor the most. It is mainly because the poor does not have surplus. Hence, the moment price increases his consumption is affected. On the other hand, the rich has surplus which can be invested in other assets and as the price of other commodities and services increases, the value of that asset may increase. This increase in the value of the asset will neutralise the impact of increase in the price of consumption.

As inflation increases at a rapid pace the lender will be at loss whereas the borrower will be benefited. Hence, with rapid increase in inflation in order to ensure their profit the banks will also increase the interest rate while lending. As the interest rate on loans increases it becomes costlier for the consumer to borrow and the consumption declines. It also becomes costlier for the investors to borrow. Hence, investment and production are also affected. Therefore, it can be said that if inflation increases at a rapid pace it will affect  economic growth in country.

If the increase in inflation is much higher as compared to the interest paid by banks on the deposits, the consumer will prefer consuming that amount of money rather than depositing it with the bank. Hence, in order to attract more and more deposit the bank will have to increase the interest rate even on deposit