European Central Bank Essay Example | Topics and Well Written Essays - 1000 words

European Central Bank - Essay Example Inflation is a rise in the price of goods 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.† 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. In order t o understand the price indices of an economy, the CPI can be understood because it helps to measure the level of increase in the prices of goods and services within the German economy, which is now being maintained at a 2.3% increase. However, this is better than the 3% that it had risen to. 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, harmonised 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 German economy took to cutting down interest rates, a primary step undertaken by any economy in the world in order to slow down the persisting amount of inflation. The resulting inflation indicates the rise in general prices for typical German consumers, and consumers investing within the economy of Germany. This entire process works according to the demand pull theory according to which interest rates within the economy need to be cut down in order to counter inflation. If the government is able to increase the rates of interest being charged on commodities being sold within the economy, then it will have a way of getting back financial resources. Low interest rates within the German economy have put more borrowing power in the hands of the consumers. Interest rates refer to the rates at which a borrower is able to borrow money in order to have greater purchasing ability. 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 a growth and expansion which has almost led in the demand outpacing the supply. The holiday season witnesses a peak in consumer shopping and indulging in goods and services more than any other period because of increased and extremely affordable tours and travels. If the demand rises faster than the supply within the economy