New and modernized products and inflation

For the past 30 years or so, inflation has been recognised as a phenomenon with unequivocally negative consequences, the fight against which is one of the main tasks of economic policy-makers. Such a view has been consolidated through empirical and theoretical research into the impact of inflation on economic growth rates. One of the channels of the negative impact of price increases on economic growth are innovations in the production process – the variance of the relative prices of different generations of capital equipment, which increases with inflation, induces firms to postpone decisions to purchase the latest and most efficient intermediate goods, thus slowing down technical progress. An equally important issue addressed in this article is the impact of inflation on product innovation. Product innovation refers to the introduction of new products, whereby new products should also be considered as upgraded products, i.e. essentially pre-existing products, but redesigned, upgraded or improved. The immanent feature of product innovation thus appears to be an improvement in product quality and this statement is taken as the starting point of the theoretical model presented below. A new and upgraded product – by definition – is a good whose characteristics are not fully recognised and the utility derived from its consumption, and therefore demand, depends on the assessment of its quality that consumers must make before purchasing it.