Inflation is the overall rise in prices of goods and services. The one time I realized the real effect of inflation was when I first read about the history of cryptocurrency, where Satoshi tried to beat the government policy of printing more money to meet up the inflation only to open the market up for harm. Inflation could be useful when it's small and positive but impairs long term performance when it's high. Real estate and value stocks Performs better with high inflation rate but bonds seem to lag as inflation lowers the present value of their future cash flow to investors. During inflation, there are always groups of people benefiting from it and a group of people who suffer the effects.
But then, How Can inflation be good for the economy?
Inflation is a function of demand and supply of money. The higher the production of money, the lower its value but then an economy running below capacity has unused resources and labor that could increase production. More money translates into more spending which leads to an aggregated demand,while higher demands triggers more production. Inflation also helps debtors pay back long with an amount less valuable. John Maynard Keynes believed inflation is there to prevent the paradox of thrift because consumers will wait for a better deal before purchasing a commodity as the price falls due to overproduction leading to a stumbling economy. However, inflation has its downsides.
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The downsides Of Inflation
Inflation Erodes Purchasing power. Since a fixed amount of money will afford less consumption, consumers will pay twice or thrice the amount , thereby eroding purchasing power. Lower income Earners tend to spend a higher proportion of their income compared to high income earners. Following historical observation by drafting the Philip curve, it shows in a short time there's higher chances of employment as demand increases but lower savings when inflation is high. High inflation also causes an increase in the interest rate of new borrowers. Inflation has its ups and downs in the economy of a country, it could sometimes be positive while other times causes recessions and hardship especially to low-income earners.