Any kind of trade or for that matter life itself now depends on a monetary system. Historically people followed a barter system and the price of any product or service depended on its demand. People used to trade spices, gold, salt and silk and so many other commodities. Everything was available and limited trade happened to a certain extent.
What changed the face of business
With the industrial revolution and mass production of goods and paper and metal, currencies brought about a complete sea change in the way business happened around the world. People would charge more for stuff that was more in demand with less supply. Slowly this is the pattern that gave rise to inequality and imbalance in the financial position of people and countries. This has also given rise to another prominent phenomenon called the inflation.
Inflation is part of the economy
Different parts of the world and various countries have different types of currencies. Inflation is the increase in the rate of prices of goods and services that can be purchased using a currency. Whenever there are political and natural events that change the prices of goods the rate of inflation also changes. Many times inflation is good for the economy. But most of the times, inflation reduces the power of money as the purchasing power of a currency is reduced and people may feel the pinch due to the cascading effect.
Spending patterns change with inflation
The increased prices of goods and services affect the cost of living directly. This has a domino effect on the other areas of spending. For example, if the prices of basic essentials go up then a family cannot spend much on other aspects, like education, entertainment, and health. A family will restructure its expenditure in such a way that the basic essentials, like food. healthcare and education are not affected much. The priorities change with every inflationary change.
All this has an impact on the economy of the country. The financial budget of a country depends on the taxes and bonds and other savings of its people. But if the common citizen reduces his savings in bonds and reduces spending on goods then the taxes and other income would also correspondingly reduce. The borrowing capacity, interest yields and the corporate taxes, everything depends on inflation and gets affected. Inflation to a certain extent is important to balance the demand and supply curve in the industry. But when it continues to rise and the majority of people find inflation affecting their lives then it becomes a matter of concern. That is why governments take the help of financial experts and economists to formulate helpful economic policies.