Inflation and its effect on economic growth

When the price of goods is increased and the value of money is decreased then it is said to be inflation. A moderate inflation is good for the economy but due to high inflation, purchasing power of the people decreased. It also decreases the demand for the goods. As the demand decreased, corporate housed stars to decrease their production. At that time Labour union demands the increase in the wages due to increase in the price of goods where as company wants to decrease the labour force due to decrease in the demand of  their goods.

The group which is most affected by inflation is the farmers and the poor population of the country because Government & Private sector companies increases the salary of their employees in the proportion to the increase in inflation but income of the above mentioned population is not increases in the same ratio.

Any Government and central bank do not want higher inflation for their country. Central Banks increase the key interest rates to control the inflation. Due to this, Commercial Banks increase the different types of loan rates for their customers. So, the supply of money is decreased in the market.

 

As we know that when supply of money is more in the country then it increases the competitiveness in the market and also increases the inflation. We  can take the example of Indian Central Bank ,Reserve Bank of India had continually hiked the key interest rates 13 times i.e. from March 2010 to October 2011 to control the inflation.