Question

how inflation is related to economy

Answer 1

Inflation, as implied, is a indication of general increases in the price/costs of goods and services. This is typically measured using the Consumer Price Index, as established by the U.S. govt. However, inflation can manifest itself in any asset class, commodity, products, services, etc... Thus inflation present in an economy is relevant for obvious reasons. The effects of inflation are relative, in that, what prices are inflating relative to other prices and costs? So if the costs of general goods and services are generally rising within an economy, yet general personal incomes stay constant then the general populations' purchasing power will decline, i.e. they will be able to purchase less goods and services given their current level of income. The economic effects of this example of inflation should be fairly clear, in that the average person will now need to make more $$$ to sustain their lifestyles.... Also if input costs are rising for a firm, yet price levels are constant, then the firm's profits will erode and thus require intensive management and changes to the firms operations, which in general, encompass layoffs, outsourcing (to lower production costs), internal restructuring, etc... Now take that company specific example, coupled with the effects on the individual, and apply it on a large scale to an entire country's economy and its population and its effects should be apparent.