ABSTRACT
Inflation reflects the buying power of money. Suppose you buy a unit of a certain
commodity, e.g., a pound of sugar for $X, today and at some future time its price changes to
$ Y. If Y>X then the buying power of your money has been reduced, that is, you have to pay
more money to buy the same commodity. Put differently, one dollar buys less of that special
commodity, e.g., sugar, as time passes. For any period,
Y — X InflationRate - f ----------
X
If Y<X then the change is called a deflation. Usually, although not always, the buying power
of money decreases with time. In other words, the same item has a higher dollar value as
time progresses.
