Inflation :

Inflation is a sustained and general increase in prices. Increase may result from either an increase in aggregate demand or a decrease in aggregate supply. Demand pull inflation is an inflationary process that begins with an expansion of aggregate demand. Any factor contributing to increased aggregate demand- such as increase in the money supply, consumer spending, investment, government expenditures, or net exports can initiate demand pull inflation. Cost push inflation is the result of an increase in the costs of production which shifts the short run aggregate supply curve to the left, and tends to push prices up while reducing the level of GDP at the same time (stagflation). As before this represents only a one shot change. For a cost push supply shock to lead to sustained inflation, there again must be continuous increase in the money supply (undertaken as policy to stimulate the economy and increase real GDP). Increased money supply pushes up aggregate demand. Inflation is an economic condition wherein the price of the goods and services increase steadily measured against standard level of purchasing power, whereas the supply of the goods and services decline along with the devaluation of money. Inflation is best measured through the Consumer Price Index (CPI). There are several factors which lead to inflationary circumstances in an economy. These factors enable the demand to increase without maintaining any balance with the supply. The factors are: 

• Increase in the supply of money
• Price Controls
• Expenditure of monetary reserves

Inflation affects the whole of the economy squarely including the taxes and import tariffs. They decrease the efficiency of the economy that produces goods and services. The most immediate effect of inflation is the decrease in the purchasing power of dollar and its depreciation. Inflation changes the allocation of income. This exerts maximum effect on the lenders than the borrowers at the time of persisting inflation, because the loans sanctioned previously are paid back later in the form of inflated dollars. Other types of inflation include hyperinflation and stagflation.