[jim556]

Could someone explain to me in general terms what happends? The information I find on the internet seems a bit to technical for me to understand. Thanks for the help guys.

[tomterm8]

One of the reasons the actual theory is so complicated, is there is no exact answer to your question. During the 1960s people believed that there is a natural rate of unemployment, and so in the long term inflation does not impact upon unemployment at all in the long term (in the short term, employment will fall as price increases, leading to a period when unemployment rises, latter however as companies increase their wages employment will return back to its natural level), although keynes observed that increased consumption would result in increased employment, this tended to be in practice offset against increase inflation (so, if employment was higher than the natural rate of unemployemnt, you would have higher inflation)

According to Friedman's theory, popular in the 80's, higher inflation leads to higher unemployement, since higher inflation tends to be associated with more inflation volatility and greater inflation uncertainty. This uncertainty reduces economic efficiency as contracting arrangements must adjust. Similarly, Disinfation has exactly the same result significantly increasing economic uncertainty and acting as an incentive to fail to spend money, leading to decreased consumption and increased unemployment.

Current economic thinking is that, in itself, it almost doesn't matter what inflation rate you have, what is much more important is that the inflation rate remains consitant, and that monetary policy will therefore be creditable. Any volatility in prices is likely to ultimatly result in greater inefficieny and consequently higher unemployment.

[jim556]

Thank you for the clarification tom, it helped a lot

[sts_raja]

What leads to Inflation?
What are the types of inflation?
How Changes in Credit Policy rate/ Bank rates affects Inflation?
How inflation Impacts?
Solution/Steps to control inflation?

Hope this would give you a Clear understanding about Inflation

http://layman-blog.blogspot.com/2010/04/what-is-inflation-types-of-inflation.html