Inflation
19 hours agoInflation refers to the increase in the overall prices of goods and services over a specific time period. As the general price level rises, the purchasing power of each unit of currency diminishes.
For instance, if one U.S. dollar could purchase two candy bars in 2000, but only one candy bar in 2020, that illustrates the experience of inflation!
Most economists concur that inflation is mainly driven by the disproportionate growth of the money supply compared to the rate of economic growth. Other contributing factors include excessive demand for goods and services and reduced supply availability during shortages.
Inflation can have both positive and negative effects, depending on how individuals are impacted. For example, high inflation benefits borrowers by lowering the real value of the money they repay to lenders, making debt less expensive.
Conversely, consumers are adversely affected by high inflation as it diminishes their purchasing power.
In the foreign exchange market, inflation is a crucial issue since it is one of the key factors that central banks evaluate when setting interest rates. It is the central bank's duty to maintain consistent and controlled inflation levels, typically aiming for a specific inflation target.
Inflation is commonly measured using the consumer price index (CPI), which monitors the cost of a selection of consumer goods and services. Fluctuations in inflation can significantly influence financial markets, as they affect purchasing power and may lead to changes in a central bank's monetary policy.
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