Since the block reward is the only source of 'new' bitcoin, the rate of bitcoin creation will be halving as well. So there will be two competing effects:

1) 'monetary' inflation will decrease, because the rate of bitcoin creation will drop from 7200BTC/day to 3600BTC/day

2) miners will be earning half as much when denominated in BTC

If the decrease in inflation doesn't cause a large enough corresponding increase in price, mining would be less profitable, causing some fraction of miners to drop out, and meaning longer transaction confirmation times (for at most 2 weeks, while the network adjusts to the change in capacity).

My guess is that the huge change in inflation will adequately compensate both miners and investors, and cause a significant enough increase in price to avoid lengthening confirmation time.

https://en.bitcoin.it/wiki/Controlled_Currency_Supply

EDIT: by inflation, I mean 'monetary' inflation, rather than price inflation.