you cannot discuss inflation with out discussing interest rates. The Nominal Rate is a static rate that is not adjusted for inflation. The real interest rate is a rate that is adjusted for expected changes in the price level (Inflation).
The fisher equition states that the nominal rate i equals the real rate ir, plus the expected rate of inflation. Example: a 1 year simple loan with a 5% rate and you expect inflation to be 3%. In this case I=5% and inflation = 3%. Therefore the real equals 5% - 3% = 2%
A general rise in the price level From too much money chasing too few goods Often expressed in CPI
Need to include risk
Real rate of 3% plus expected inflation of 4% plus risk factor of 2% requires a return of 9%.
Inflation distorts incentives and redistributes wealth. If you expect inflation to increase unexpectedly, would you rather be a lender or borrower?
Savers tend to hedge inflation, Flight to gold and fixed assets. As a result, in periods of high inflation money flows out of the securities market into gold, real estate and the like
as DOMS said reasonable inflation is OK, but when it gets aggressive and out of control it strips the economy of the wealth thats being created. investors pull out of the stock echange and enter into commodities which destroys wealth, people become unsure of the future and blah blah im done!