How does Inflation Affect the Economy

Inflation occurs when the total demand for goods and services in an economy exceeds the supply of the same. When the supply is less, the prices of these goods and services would rise, leading to a situation called as inflation.

Inflation affects the rich and the poor and it poses a threat to the economy. Now the question is how does inflation affect an economy of a nation? If you check global market history, you would understand that each and every country has under gone inflation at any one point of time. For instance, after the World War I, the German government lowered the value of their currency by printing massive amount of notes. And to buy a loaf of bread one had to spent a huge amount. The present downward trends in the world economies have resulted in credit crunch and financial crisis. These situations have invoked the curiosity of many about why does inflation occur?

When inflation affects an economy, to maintain the same level of living standards you would have to pay more. That is you would have to pay more for same amount of goods and services you had used prior to inflation. Remember, your income may not increase at the same rate as inflation.

At the time of inflation, financial planning becomes difficult. The reason - the value of money decreases with inflation. It would affect the pensioners more than the ones who are currently employed.

In an inflation-affected economy, retirement planning is nearly impossible because the premium you pay would have to be high if you want to keep the same quality of life.

People tend to save less in an economy affected by inflation because the price of services and goods are ever time high and there is nothing or very less leftover income available to save.

However, economists opine, many of the issues stemming from inflation are caused by the widespread consumer panic and fear and not by the market alone.