The European Central Banks Targeted Inflation Rates - Assignment Example

? Inflation in Germany Introduction: The holiday season saw a rise in the European Central Bank’s targeted inflation rates according to the German government this year. Due to increased holiday accommodation and travel and tourism costs, a 2.3% increase was witnessed in the Consumer Price Index which has led the government to undertake sharp steps such as decreasing the cutting down on interest rates, which has subsequently resulted in an economic slowdown in the Eurozone. "The rate of inflation is declining more rapidly," said Commerzbank economist Ulrike Rondorf. "In January, it should fall below the critical 2 percent mark for the first time in a year." (Marsh, Sarah) Due to inflated prices, several economists have estimated a slump in the European economy including a look at higher household energy and fuel prices due to more demand and usage of the same. Discussion: Inflation is a rise in 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 “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. In order to 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 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 sees 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 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 then the interest rates may increase and this will help to slow down the amount of cash that enters the economy, which is also not in its best interests. Therefore, it becomes imperative for the economy to keep a check on the indicators of inflation, in this case primarily the Consumer Price Index. Recommendation: 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. In Germany as well, the rates of inflation are now being put to check as the government is trying its best to reverse the slowdown that is being faced by the economy. There needs to be an ample amount of economic growth taking place as well as employment measures being undertaken in order to keep up the wages as well as maintain a balance in terms of inflation. More demand comes from an increase in consumers and since Germany has become a major holiday hotspot, it must take measures to maintain equilibrium in the inflation levels. But mindful of a looming European recession that could usher in another credit crunch, the bank reversed direction to cut interest rates in Germany, twice in the last two months, since when price pressures have eased. Conclusion: In conclusion, the article has been presented well with adequate statistics in order to picture the growing rates of inflation being experienced by Germany and how interest rates and the CPI plays a role in understanding how to maintain consumer price levels of goods and services. Commodities create a demand in the economy, and in the modern day and age it has become vital as students of economics to comprehend how the simple aspects of demand and supply can create such a domino effect on the entire economy, especially during peak seasons and holiday periods. It is further interesting to note the changing waves within an economy as it undergoes various changes from the Federal Reserve in order to counter the problem at hand and bring about moderate solutions which will not harm the ability of the consumer as well. This is how an economy and government will be able to function in an acceptable manner by the people, and for the people, as seen within the German economy, through the article. References: Parkin, Michael. "Inflation." In The New Palgrave: A Dictionary of Economics. Edited by John Eatwell, Murray Milgate, and Peter Newman. Vol 2.New York: Stockton Press, 1987. Marsh, Sarah. "German Inflation Eases for Third Month Running." Business & Financial News, Breaking US & International News | Reuters.com. Available at http://www.reuters.com/article/2011/12/29/germany-inflation-idUSL6E7NT1VR20111229. [Accessed 08 January 2012]. "Inflation in Germany - Current and Historic German Consumer Price Index (CPI)."Worldwide Interest Rates and Economic Indicators. Available at http://www.global-rates.com/economic-indicators/inflation/consumer-prices/cpi/germany.aspx. [Accessed 08 January 2012]. Hyperinflation: The Concise Encyclopedia of Economics | Library of Economics and Liberty. 2012. Hyperinflation: The Concise Encyclopedia of Economics | Library of Economics and Liberty. [ONLINE] Available at:http://www.econlib.org/library/Enc/Hyperinflation.html. [Accessed 08 January 2012]. Inflation Germany 2011 – CPI inflation Germany 2011. 2012. Inflation Germany 2011 – CPI inflation Germany 2011. [ONLINE] Available at: http://www.inflation.eu/inflation-rates/germany/historic-inflation/cpi-inflation-germany-2011.aspx. [Accessed 08 January 2012]. Read More