The European Central Banks Targeted Inflation Rates Assignment

The European Central Banks Targeted Inflation Rates - Assignment Example Inflation is a rise in the price of soothing ds and services within an economy which results in a decline in the purchasing power of every subsequent unit of currency and this causes a loss in the real value of exchange within an economy. The main measure of inflation is the Consumer Price Index which provides an indication of the price level of consumer goods and services which are purchased by households, business firms, the government as well as the rest of the world (in case of an open economy). The CPI in the United States is defined by the  Bureau of Labor Statistics  as â€Å"a measure of the average change over time in the prices paid by urban consumers for a  market basket  of consumer goods and services.† This paper helps to provide an insight into the inflation that is currently taking place within the German economy. As per the current happenings within the German economy, the prices of goods and services naturally saw a hike due to the holiday season; this period mostly witnesses an increase in demand of goods and services which is met by an almost equivalent amount of supply. ... Most governments, especially in the European zone, had been able to recover well from the financial crisis that took place world over in 2008-2009 but the repercussions of that are lingering on as inflation in the same economies. German consumer prices nonetheless, harmonized to compare with other European Union countries, showed a rise of 2.4 percent on the year in December, down from 2.8 percent in the previous month. The following graph helps to show the Consumer Price Index in Germany and the changes that the same has undergone over a decade. The graph thus helps in interpreting the various changes within the German economy with respect to fluctuations in the Consumer Price Index. By understanding the ups and downs within the graph it may be understood that the demand and supply situation of a consumer base within Germany has never been a constant; it varies according to the variations of the need for goods. Thus, putting the same to thought, it may be comprehended that a hike is usually seen during the peak holiday season when the demand and supply of goods and services see a huge rise. Chart - CPI inflation Germany 2011 (yearly basis) Interest rates refer to the rates at which a borrower is able to borrow money in order to have greater purchasing ability. (Parkin, Michael) Since loans and smaller debts can be taken from the European Central Bank at lower rates, consumers have been able to increase their purchasing powers and have been thus causing the economy to slow down considerably. Due to increased spending by the consumers, the economy has witnessed growth and expansion which has almost led in the demand outpacing the supply.