Mary Kay Inc., Building a Brand in India

The Concept of Inflation

        In accordance to macroeconomics, inflation can be described as the measurement of the general price level of goods and services as they increase over time.  The word “general”, is used to describe the overall price increase, because inflation can still occur even when there are steady or declining prices on some individual goods and services.

Inflation has a direct relationship with the purchasing value, or purchasing power of money.  Inflation represents a reduction in your overall ability to purchase goods and services.  As inflation increases, or rises, our money has a lesser purchasing value.  This is because of the fact that the same amount of money can now buy fewer goods and services than it could before the inflationary price level increase.  Your money loses its value when inflation occurs.  However, positive price trends, or price increases are a habitual outcome of a growing economy.

        The level of inflation is also an excellent indicator of how healthy an economy is.  How is this true? As previously stated, when the general price level rises, consumers are now able to purchase a lesser amount of goods or services with the same dollar amount.  When consumers are able to purchase fewer items, this represents a decrease in consumption which will then in turn cause a decrease in the overall GDP (Gross Domestic Product: GDP= Consumption + Investment + Government Spending + Net Exports).

        What is the cause of inflation? Factors that produce inflation can be narrowed down to changes in supply or demand for goods and services that effect the economy as a whole. Changes, or more specifically, increases in the money supply can also cause inflation.

“World Market Rattled by US Inflation Concerns”

This article expresses the concern shown by international investors in response to the rise in interest rates throughout the United States economy. In this instance there is actually a decrease in inflation, which is then causing the interest rate to rise. How is a decrease in inflation produce an increase in interest rates?