... wealth effect. Another factor of consumption is inflation. This increases the general level of prices and has two effects on consumption. Firstly, if households expect prices to be higher in the future then they will be tempted to bring forward their purchases. Thus a household's anticipation of inflation can increase consumption and reduce saving. However, this may be outweighed by the effect of inflation on wealth. Rising inflation tends to erode the real value of monetary wealth. Households react to this by trying to save as much as possible and so consumption is reduced. The negative effect of inflation on consumption caused by the eroding of real monetary wealth more than offsets the positive effect on consumption caused by earlier purchases. Much of the money to buy durables, e.g. cars, comes from credit finance and so an increase in the rate of interest increases the monthly payments for these goods. ...

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