positive effect of inflation only applies when inflation is low and
within an acceptable range, like say 2 to 4%.
benefits include reduction in unemployment; this occurs because
most workers' wages are locked in by contract and with inflation,
their real income actually decreases. this allow firms to hire more
workers under steady and controlled inflation.
also, investments will increase because inflation is predictable
hence firms will have a bigger expectation of profits
low inflation also keeps nominal interest rates low, adding to
increased investments.
low inflation does not equal 0 inflation; achievement of inflation
= 0 would lead to unemployment (keynesian demand pull)
negative effects of inflation occurs when there are excess levels
of inflation.
these include distribution costs from lenders to borrowers
(borrowers benefit from inflation), recipients to
providers of fixed income (eg government payouts to pensioners are
lower in real terms), taxpayers to government (wage increase will
shift workers into higher tax brackets, but higher inflation causes
real wage to be much lower)
also, there are output costs of inflation such as decrease in
investments due to uncertainty of the future, increase in savings
(decreased consumption), imports (foreign goods are cheaper) and
decrease in export (local goods are more expensive); these
contribute to decrease in GDP.