A rise in the general level of prices which results in a fall of purchasing power and the decline of the value of money. Inflation adversely affects the Economy by increasing uncertainty and discouraging savings. It also means high nominal rates of interest which discourage investment. It also negatively affects the Balance of Payments by making imports cheaper and exports more expensive. Furthermore, a fall in the value of money will redistribute income - it will remove purchasing power from those living on fixed incomes (eg. pensioners) and shift it towards those who draw a variable income from prices and interest.
Types of inflation:
- /Demand pull inflation
- /Cost push inflation
- inflation induced by adaptive expectations
- inflation induced by the goverment printing an excess amount of money (increasing the money supply) - also known as seignorage
An extreme type of inlation is known as hyperinflation.