Prices in general would only rise if, on the average, demand increases or supply decreases. In the first case, when demand increases and this results in inflation, we describe it as demand pull inflation. On the other hand, when cost increases and this causes supply to decrease in turn, and this results in inflation, we describe it as cost push inflation. But these two different causes of inflation are not independent, of course. This sort of vicious circle could account for the persistence of inflation in the latter half of the twentieth century, and many economists believe that it does.
Uncertainty discourages productive activity, saving and investing.
Inflation reduces the competitiveness of the country in international trade. Money may be replaced by less efficient means of exchange. Stagnation Stagnation A stagnation is a period of many years of slow growth of gross domestic product, in which the growth is, on the average, slower than the potential growth in the economy. Some economists believe that the U. S. A. has suffered from a stagnation in recent decades. We know that recession and inflation often are related.