Inflation is defined as "A sustained rising trend in general price level or a rate of expansion of money : income greater than the rate of growth of real output." Under such circumstances, the general prices increases, and in turn the value of money decreases. Although, the circulation of money increases, the availability of goods is limited and this results in price rise.
Effect of Inflation on:
(i) Fixed income groups- This includes pensioners, government servants owners of government securities and promissory notes and others who get a fixed money income. They are known as rentiers. This class is worst affected by inflation because the purchasing power of their fixed income goes on decreasing with rising prices.
(ii) Producers- During inflation, the producers and businessmen gain in the short period. Usually the cost of production does not rise as fast as the price of their product and so there is an artificial margin of profit. As against this they may also be effected adversely on the long run. If the price level goes on increasing, the total consumption of their product would fall. The reduced consumption will ultimately rise the cost of production per unit and reduce the profits.