Abundant empirical evidence points to the non-linear character of the relationship between inflation and economic growth. The model presented in the paper fills a gap in the existent economic theory, which so far has failed to explain the non-linear influence of inflation upon output growth rate. The model is based on microeconomic analysis of the behaviour of final goods producers, who make the decisions as to the adoption of new technologies, as well as R&D enterprises, which supply the intermediate goods and determine the intensity of innovative activity. Inflation introduces doubt as to the relative price of the current and future generations of an intermediate good. This forces the R&D sector to deliver increasing technological advances, in line with the mounting requirements of the final goods sector. Since radical innovation entails intensified research effort, and technological progress is difficult to achieve in a stepwise manner, inflation is conducive to economic growth - at least up to a certain threshold value. Beyond that value the relation between the two variables becomes negative.