Q:

How does inflation affect the economy?

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Quick Answer

Inflation is an increase in prices, which affects the economy by reducing the purchase power of consumers, causing companies to earn less revenue. Inflation also increases the rate of unemployment.

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How does inflation affect the economy?
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Full Answer

According to About.com, inflation makes financial planning difficult because valuable rules of economics are broken when it occurs. Inflation reduces the rate of savings and investment in an economy because the interest rates for loans and mortgages increase and the market becomes uncertain.

Wikipedia notes that inflation lowers the value of money, leading to a decrease in the standard of living. Inflation also causes inefficiencies in a market, which slows business processes. Governments control inflation through monetary policies like the reduction of money supply to the economy.

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