What is the effect of inflation on the economy?

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently purchasing power is falling. Inflation can have a number of effects on the economy, including:

  • Reducing purchasing power: As prices rise, consumers are able to buy less with the same amount of money, which can lead to a decrease in overall economic activity.
  • Encouraging investment: High inflation can lead to low or negative returns on savings, which can encourage people to invest their money in assets such as stocks or real estate that may appreciate in value.
  • Increasing interest rates: Central banks may raise interest rates to curb inflation, which can make it more expensive for individuals and businesses to borrow money, which may slow economic growth.
  • Increasing uncertainty: Inflation can make it difficult for businesses to predict future costs and revenues, which can make it harder for them to plan for the future and invest in new projects.

Overall, inflation can have both positive and negative effects on the economy, and policymakers must balance the need to control inflation with the need to support economic growth.

The effects of inflation are often not directly felt but are played out over a long time, especially long-term investments are vulnerable to inflation.


At Horizon65, we created a mobile app that enabled you to check the effect of inflation on your savings.

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