The first effect is just another way to define inflation. We know that inflation is an increase in the overall price level of goods and services in an economy over a period of time. Therefore, if you want to maintain the same level of your living standard, you have to pay more. It’s mean that the value of money is decrease, which lead to the reduction purchasing power of consumers. A ‘basket’ of goods and services is used to track inflation in a specific market or country. The ‘basket’ is recurrently adjusted due to changes in consumer bias. It’s used in calculating Consumer Price Index (CPI) - the most common measure of price changes. 2. Motivate spending and investing: Because inflation erodes the real value of money, it is better to hold less money and buy things that probably won’t lose value. For consumers, that means filling up gas containers, stuffing the refrigerator, buying shoes or clothes in larger size for children... For businesses, it means making capital investments because inflation can affect the liquid assets. Many investors buy gold or investment products with returns that are equal to or greater than inflation. 3. Causes More Inflation Unluckily, the desire to spend and invest tends to boost inflation in succession. As people and businesses spend more rapidly, the economy finds itself overstocked in cash no one wants. In other words, the supply of money exceeds the demand, and the price of money – the purchasing power of currency – falls at a rapid rate. The result is hyperinflation. 4. Raises the Cost of Borrowing For the past century in the U.S. the approach has been to manage inflation using monetary policy. To do so, the Federal Reserve (the U.S. central bank) relies on the relationship between inflation and interest rates. If interest rates are low, companies and individuals can borrow cheaply to start a business, employ new staffs, or buy a new office. In other words, low rates urge spending and investing. By raising interest rates, the regular payments on that boat seem a bit high. Better to put some money in the bank, where it can earn interest. When there is not so much cash sloshing around, money becomes scarcer. That scarcity increases its value, although as a rule, central banks don't want money to become more valuable, they fear whole deflation nearly as much as they do hyperinflation. Rather, they drag on interest rates in either direction so as to maintain inflation close to a target rate. Another central banks' function in monitoring inflation is through the money supply. If the amount of money is growing faster than the economy, money will be worth less and inflation will arise. When central banks want to raise rates, they sell government securities and eliminate the proceeds from the money supply. As the money supply decreases, so does the rate of inflation. 5. Reduces Unemployment There is some evidence that inflation can wear down unemployment. According to sticky wage theory, wage have a low response to changes in economy. John Maynard Keynes theorized that the Great Depression led to the sticky – down wages. Because workers didn’t accept reduction in salary, they were sacked instead. Therefore, unemployment dramatically increased. The same phenomenon may also work in sticky – up wages. It means that when inflation rises into a certain rate, employers' real payroll decreases and more worker can be hired. That hypothesis shows the inverse connection between unemployment and inflation. 6. Avoid deflation: Deflation is the overall decrease in prices for goods and services occurring when the inflation rate falls below 0%. At this time, the value of money is increasing. It reduces the spending because people rather buy later than now. It also results in economic stagnation. Deflation increases the real value of money and the real value of debt. Debtors have to spend more of their income to pay all of their debts. So, it is important to maintain inflation in a reasonable level. Many policymakers believe that a reasonable level of inflation rate is about 2 percent. The inflation rate is low enough to allow the economy to subsidy fully from price stability. It avoids unproductive activities which prevent economic growth.