Inflation affects the price of all the expenditures in Superpower 2. It is controlled by either raising the interest level, or lowering it. High inflation lowers economic growth, and should be avoided by increasing interest levels. However maintaining high interest lowers the overall economic health of your country, lowering overall resource generation, and may also stunt growth in the long term.
Maintaining an inflation level between 2% and 3% is advised for optimal growth. Though it is not necessary in order to keep up with the global economy.
It is a viable strategy to neglect inflation altogether, as its influence on the economy is relatively small.