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According to McCulloch (1982), inflation is a continuous erosion of purchasing power of money and the general rise of prices of goods and services in a particular economy. With an increase in inflation, consumers have to pay more for the same goods and services than he used earlier hurting the standards of living. The main gauge for inflation is called CPI (Consumer Price Index) which is the measure of the change of basic consumer goods and services price. This fall of monetary unit's purchasing power has a number of effects to consumers and though inflation has negative effects it still has a number of positive effects.
Due to the decrease in the value of money, the overall price of goods and services increases. The hike of prices causes consumers to dig dipper in their pockets to purchase the goods or services. Through inflation, many consumers can change their spending habits and spend less than they used to. Inflation still has another negative effect especially when consumers start expecting inflation. Some consumers will tend to spend today rather than on another day because they think that the cost of items will increase even more. According to McCulloch (1982), this may lead to spiraling inflation.
Inflation is not always bad at all. Selgin (1997) argues that inflation also has some positive consequences.
Inflation can be of benefit to a person having fixed assets such as bonds or treasury notes. Such assets can earn a constant return every year, and as inflation spirals at a higher rate more than the return, they become less and less valuable. As they depreciate their value, many are forced to sell them further losing their value. This makes most governments to offer a higher rate of interest to sell them at all. Inflation is also beneficial to the borrowers who pay a fixed rate of interest on the loans as their lenders lose the purchasing power from the interest earning.
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