The Increase in GDP implies that an economy has experienced either of following five cases:
Produced more at the same prices.
Produced the same amount at higher prices.
Produced more at higher prices.
Produced much more at lower prices.
Produced less at much higher prices.
Case 1 implies that rate of production is being increased to meet increased demand. Increased production leads to lower rate of unemployment, further increasing demand. Higher wages lead to higher demand as consumers spend more freely. This leads to higher GDP combined with inflation.
Case 2 implies that there is no increased demand from consumers, but that prices are higher. Both GDP and inflation increase in this scenario. These increases are due to decreased supply of key commodities and consumer expectations, rather than increased demand.
Case 3 implies that there is both increased demand and deficit of supply. Businesses must hire more employees, further increasing demand by increasing wages. Increased demand in the face of decreased supply quickly forces prices up. In this scenario, GDP and inflation both increase at a rate that is unsustainable and is difficult for policymakers to influence or control.
Case 4 is unheard of in modern democratic economies for any sustained period and would be a case of deflationary growth environment.
Case 5 is very similar to what the United States experienced in the 1970s and is often known stagflation. GDP rises slowly, below the desired level, yet inflation persists and unemployment remains high due to low production.
Three of these five scenarios include inflation. Scenario 1 eventually leads to inflation, and scenario 4 is unsustainable. From this, it’s clear that inflation and GDP growth go hand-in-hand.