Explain the impact of inflation on consumption

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Here is some information for you regarding Inflation:

Inflation, however, above relatively low levels is generally considered as having increasingly negative effects on the economy. These negative effects are the result of "discounting" previous economic activity. Since inflation is often the result of government policies to increase the money supply, the government contribution to an inflationary environment is a tax on holding currency. As inflation increases, it increases the tax on holding currency, and therefore encourages spending and borrowing, which increase the velocity of money, and therefore reinforce the inflationary environment, a "vicious circle". To extremes this can become hyperinflation.

* Increasing uncertainty may discourage investment and saving. Panicky spending that tries to anticipate inflation has the effect of increasing the velocity of money and the inflationary cycle. Sudden spending also contributes to economic bubbles as demand (and thus prices) increase drastically.
* Redistribution
o Inflation tends to redistribute wealth/income/purchasing power from those on fixed incomes, such as people living off bond interest or a fixed pension, to those whose income is based on market conditions (for example, wages and company dividends, which tend to keep pace with inflation).
o Similarly inflation will redistribute wealth from those who lend a fixed amount of money to those who borrow (if the lenders are caught by surprise or cannot adjust to inflation). For example, if the government is a net debtor, as is usually the case, inflation will reduce the burden of the debt redistributing wealth towards the government. This effect is sometimes referred to as the "inflation tax".

There are different schools of thought as to what causes inflation. The two most prevalent theories are the neo-classical theory that inflation is driven by increases in the money supply, often used to finance government spending and the neo-Keynesian view that inflation is the result of diminishing returns of productivity.

One of the oldest and most widespread theories of inflation is also the most straightforward: inflation is an increase in the supply of money. Before the invention of Fiat currency metals such as Copper, coins were valued by the intrinsic value of the Silver or Gold (or, rarely, some other valuable material) from which they were made. This placed a physical limit on the rate of inflation as the increase in metal for coinage was limited by the rate at which it could be mined and is why gold is considered money and not just currency.

The limits of metal supplies lead to the invention of Debasement by the Roman Empire. As the empire's need for currency rose, the precious metal content of the coins minted was replaced by base metals such as copper. This lead to an increase in the supply of currency and inflation. As a result of this debasement, the population began hoarding the coins made of gold. A concrete example of current day debasement is found in the penny which has not been made of copper since 1982. As with coins during the Roman empire, the more precious metal is replaced with a more base one; in this case zinc.

Misunderstandings of monetary theory have lead to the belief that inflation is related to the growth of GDP or to interest rates but this belies the simplicity of monetary theory which predates the Central bank or economic measures like GDP and GNP. Another misconception which monetary theory rejects is that prices are inflation and stems from the confusion between cause and effect. Prices are based upon the Scarcity of the currency being used and when the supply of the ...