"Productivity" is any activity that increases the value of something by adding human skill or labor. Any activity.
It includes graphic design, entertainment, writing, banking, and many other things where someone doesn't actually "build" an object. It also includes services. The idea that wealth can be created only by physical construction is not true.
It is true that increased productivity in all areas can have a negative effect on employment. Many people blame the current employment problems as much on increased productivity per employee as on the economic downturn.
Inflation comes from the government constructing money out of thin air. Some of this is through the process of borrowing money from taxpayers who are paid interest with money...from taxpayers. Normal borrowing and repayment in the private sector involves creation of real wealth somewhere in the loop.
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