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Similarly, inflation causes uncertainty about future and this situation will discourage savings and investments. In addition to this, inflation promotes speculation and hoarding since people expect further price rise in future. This worse economic condition causes shortage of goods as well. However, inflation can also contribute some benefits to the economy by enabling the central banks to vary nominal interest rates in order to mitigate the impacts of recession. In contrast, deflation indicates a decline in the general price level of goods and services.

A reduction in the supply of money or credit often causes deflation; a decrease in personal, government, or investment spending may also lead to deflation. Generally, deflation occurs when annual inflation rate falls below zero percent (a negative inflation rate). Deflationary spiral is a danger that arises from deflation and this situation would make economic environment worse. This paper will critically evaluate the different aspects of zero inflation and moderate inflation. Inflation and its Impacts on Economies According to Feldstein (1998), the inflation always hurts standard of living of people since rising prices force them to pay more for the same goods and services. . Similarly, if people expect inflation they are more likely to be extravagant as they envisage worse condition in near future.

This economic condition turns to be one of the potential challenges as it may lead to further inflation. This adverse economic condition spirals out of control and hence it is known as spiraling inflation. To illustrate, when people get worried about the further price rise, they tend to plan their economic activities such as spending and buying for a short period. Although this short-term focused financial planning may add mobility to the economic performance of the nation, it involves some pitfalls also.

For instance, the economic uncertainty regarding future would persuade the entrepreneurs and other business houses to postpone the launch of their new ventures, and that would ultimately impede the economic growth of the nation. Keynes has classified inflation into two; demand pull inflation and cost push inflation. Under demand push inflation, aggregate demand exceeds aggregate supply and it leads to adverse conditions such as deficit financing, agricultural backwardness, and labor inefficiency.

In the case of cost push inflation, cost highly increases due to decrease in supply. This condition also affects the economy as it happens along with currency devaluation, profit deflation, and wage increases. Sometimes, the difference between demand and supply and resulting inflation may go beyond government control. In such situations, buyers would trim down their day to day expenses in order to vie with the increasing price level. At the same time, producers may cut down their output levels so as to retain minimum profit