Inflation and the economy of a country are closely related. The effect on the economy of any country is not immediate or it does not affect the economy overnight. There is a cumulative effect. Several such changes build up to bring about a big change. The economy of a country is affected by inflation in a number of ways.
Inflation and the economy both influence all the major macroeconomic indicators of a country. The various macroeconomic indicators include the following:
Gross domestic product or GDP
Producer price index (industrial)
Consumer price indices
Industrial production
Capital Investment
Agricultural production
Export
Import
Demography
Debt
Inflation not only affects the macroeconomic indicators, it affects the living standards of the people. As the percentage of inflation increases, the cost of all commodities also increases. However, the same is not true for the salaries or the wages. It results in a mismatch of income and expenses. As a result, the people are immensely impacted by these changes. The exchange rates of all currencies also change. This in turn influences trade. When exchange rates are affected, the interest rates cannot be far behind.
Inflation and its effect on economy is enormous. In other words, all events are interlinked and the entire economic cycle gets upset. Inflation and its effect on economy may be of two types: