Inflation, the rise in prices or the decline of the value of the currency, is often caused when supply is too short to meet increasing demand of products. This situation is seen in a growing economy that allows people to spend more, and stores would run out of products without increasing the prices.
When the government spends more or taxes less, the value of the currency decreases relative to the foreign currencies.
The increase of money supply increases the prices of imported products and eventually all the prices.
When prices go up, the consumption and the likelihood of new employment decrease, but as the prices continue rising, people tend to increase consumption before increasing the prices, and thus supplies increase to meet the increasing demand, and the likelihood of new employment increase, which grows the economy.
Inflation is also caused when supply cost of products increases, for example increase of wages or the damage of natural disasters, if the demand is the same.
The central bank wants to keep the value of the currency low, and when it happens, the price of imported products goes up, and inflation is triggered as well as the economic growth.
The inflation is good at around 2 %. For a common monetary policy, when a country's inflation rate is lower than 2%, interest rates should be lower to increase lending. When a country's inflation rate is higher than 2%, it means the economic growth is too much and is likely to lead the prices go up faster than wages, and interest rates should be higher to decrease lending.
Deflation decreases the consumption since people want to wait the lower prices in the future. This decreasing demand reduces the production and the likelihood of new employment.
The decline of the consumption causes the prices go down more, meaning deflation gets worse. For this reason, deflation is worse for economic growth than inflation.