"Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair."
Inflation is a rise in the general price level of goods and services over a period of time which erodes the purchasing power of your money thereby effectively reducing your ability to pay for things. In a way, inflation acts as an unlegislated hidden tax you mandatorily pay regardless of your income tax slab.
Erodes your purchasing power
Suppose you buy a box of 20 candies for ₹100. A year later, with ₹100 in hand, you go to buy the same and realize that its price has gone up to ₹105. The money you have is unchanged but the price of what you want to buy has inflated by 5%. Your ₹100 is now able to purchase only 19 candies instead of 20. Inflation has reduced your purchasing power. You need ₹105 now to have the same purchasing power (of buying 20 candies) that ₹100 had earlier.
Basically, your money continues to lose value over time due to inflation even if you hide the money under your mattress or bury it in the ground.
Makes safe investments risky
Just saving money and earning nominal interest lower than inflation is equivalent to losing money and becoming poorer since that money will be able to buy far less in the future. Many supposedly safe and risk-free investments (e.g. savings account, fixed deposits, bonds and other fixed-income products) more often than not offer interest rates which struggle to beat inflation on a post-tax basis. You are exposed to inflation risk which has the potential of reducing your purchasing power.
Real Interest Rate = Nominal Interest Rate - Inflation Rate
In other words, nominal rate is the growth rate of your money while real rate is the growth rate of your purchasing power.
Let's say for example, fixed deposit interest rate is 8% p.a., annual inflation is 6% while your income tax slab rate is 30%. In this case:
Your tax-adjusted nominal interest rate = 8% x (100% - 30%) = 5.6%
Your real interest rate = 5.6% - 6% = -0.4%
Result: You would be safely losing 0.4% of your money value each year.
Protecting against inflation
Any financial plan should always be worked out using real rate of return, which is the return you get after factoring in the effects of inflation. Tweak your calculations to ensure that purchasing power is not compromised while setting investment goals. A proper balance between equity and debt asset classes in your investment portfolio can easily help beat inflation in the long run.