Inflation is defined as the rise of the overall prices of goods and services over a certain period in time. This means that, as general level of prices climb, the purchasing power for each unit of currency declines. For example, there is inflation if one dollar can buy two candy bars in 2000 and only one candy bar in 2009. Most economists agree that inflation is caused primarily by the imbalanced growth of money supply with respect to the rate of economic expansion. Other reasons include excessive demand for goods and services and decreased availability of supply during scarcities.
Inflation has good and bad effects depending on the people concerned. For instance, high inflation is helpful to borrowers as it decreases the real value of money they pay to their lenders. Consumers, on the other hand, are obviously hurt by high inflation as it erodes their purchasing power.
In the foreign exchange market, the issue of inflation is very important because it is one of the primary factors central banks consider when determining interest rates. The Federal Reserve, the US« Back to Main Page