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This essay will look at two important theories of inflation, and will show the similarities and differences between both of these theories. Inflation occurs when there is a sustained increase in the general level of prices. This means that it isn’t a one-off increase in prices, or a situation where prices are only rising in certain sectors of the economy. When inflation is happening, money loses its value, as its purchasing power is reduced. Currently, inflation in the UK is around 2% a year, which is lower than it has been in the past. For example, the inflation rate averaged 15% between 1973 and 1981, and 6% between 1981 and 1990 (Begg, p.274). Inflation can cause a number of problems for an economy, so it can be said that there are costs of inflation. The costs of inflation include the menu costs, which are the costs which occur when firms need to change prices, and the shoe leather costs, which occur when people try to reduce their cash balances, because money quickly loses its value during times of inflation. Another cost of inflation is the effect it has on the distribution of wealth in an economy. Inflation can cause a redistribution of wealth from savers to borrowers, because the real value of debts (the nominal va