Understanding Inflation vs. Economic Growth: Key Differences

In economics, inflation rate and growth rate mean different things .

Inflation rate and growth rate, as economic terms, might sometimes get confused as meaning the very same thing. However, defining each term separately helps us to recognize the main differences between the two.

Inflation Rate

An inflation rate is the rate at which prices rise and fall. According to WiseGeek.com, a rise in prices causes a nation's purchasing power, which is the value of money measured by the quantity and quality of products and services it can buy, to fall.

Growth Rate

The rate of an increase or decrease in value can be defined as a growth rate. Another way to put it, according to InvestorWords.com is, "Year-over-year change, expressed as a percentage."

Differences Between the Two

The growth rate relays information about gain while the inflation rate might counter gain by causing the amount of purchasing power to drop. An example from BizCovering.com explains that, "If the investment paid 10 percent and the cost of goods increased 12 percent, the investor has lost 2 percent in purchasing power over the investment term."