Defining Inflation

Economics Economics Questions
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1

I am looking for a good, compact, definition of inflation. Ignoring the mainstream ‘increase in general level of prices’ with all its weaknesses, I came upon three definitions in the Austrian tradition that seemed suitable:

  • a general increase in money supply (Shostak) - very clear, but any increase in the supply of money will have a tendency to raise money prices, which is not unnatural in itself; the evils of inflation as we know it come from a more specific phenomenon

  • increasing the money supply by violating the property rights of others (Hulsmann) - a beautiful, idealistic definition with a strong appeal, but it immediately begs for more details of which property rights are violated and in what manner. Not short in the end.

  • the process of issuing money beyond any increase in the stock of specie (Rothbard) - this is a pretty good one, if you understand what it says. I find this probably the most useful, but it could handle some rewording.

I bumped into other definitions, but many refer to backing by precious metals, which unfortunately does not apply to the current situation. A more general definition is needed.

If you know of a good definition and can point me to the book or article it comes from, it would be a great help. Creative rewording of other definitions is also welcome.

2

Well, inflation is just a general increase, across the board, of the price of goods and services.

There are two causes of inflation. The first, is an increase in the money/credit supply. The second, is a reduction in the supply of private sector goods and services with an increase in the supply of government goods and services..

3

Increasing the supply of money beyond demand. Horwitz, Garrison and others.

The most useful one I think.

4

Hmmm… you probably mean, an increase of prices of goods or services, otherwise I’m not sure what kind of increase it would be. :slight_smile:

The first cause is known to me; the second one you mention does not sound familiar. How does that work? Is there any place I could read something about it?

5

Short and to the point, I like that. And yet, one has to ask how it would be increased beyond demand - does it mean people have to be forced to accept it in some way? Also, the point could be made, that there is always demand for more money, justifying any increase in the supply of money.

6

Except that it relies on the nonsensical concept of ‘demand for money’.

7

I wonder how it came into existence then?

8

You mean the demand-for-money concept ? It came into existence when some people wanted to justify counterfeiting using economic jargon (but not sound economics).

9

Money itself, if noone wanted it. Another market failure apparently.

10

if a specie money is being used and there is an increase in specie…that would seem to be an increase of the money supply which according to many at the mises site is also called inflation.

if circulating paper (or electronic) titles to specific weights of gold/specie are increased beyond the total weight of gold (or whatever specie) there is i take that also to be inflation…but of a fraudulent nature.

now i am not sure about the complete economic effects of straightforward specie inflation…for instance, ‘the pain in the ass of mining, seignorage and minting etc’ effects on the economy as opposed to ‘virtually no cost inflation increases of numerated-paper/string of zeroes-digi-money’ effects on the economy.

as i have read at mises (if true) specie (gold/silver) money isnt what circulates at all but a virtually no-cost to produce mixture of paper/coin currency (i recently received a 1952 quarter with 90 percent silver…market value at the time near $2.00 but would barely get me a pack of gum at the store) and various types of federal reserve accounting-money and credit injections. a process i still dont understand.

good luck

11

Inflation is an increase in the supply of money or credi. Nothing more, nothing less. Deflation is a decrease in the supply of money or credit. Nothing more and nothing less.

In an imaginary world of a fixed stock of goods (assume consumibles replaced at precisely the rate of consumption), and no changes in the preference of holding cash, the aggregrate price level can not change. Specific goods could go up, but the money spent on them would be not spent on other goods, forcing their prices down.

In the real world, even on a 100% reserve gold standard, there is inflation. More gold is mined than is consumed. Thus the amount of gold in the marketplace increases with every increment of time. However, the rate of increase is slow and stable (at least as demonstrated in history, and in aggregate). The rate of increase of goods and services far exceeds the rate of increase of the money supply, so prices fall over time (more goods available for the given stock of money, prices of goods must go down as they compete for the money).

In a period of destruction of goods or uncertainty, shortages happen. Prices for goods go up (less goods available, same money stock, competition for goods drives prices up). This is not inflation or deflation. Inflation and deflation are changes in the supply of money or credit. This is a change in prices due to a shortage of goods.

In our current real world, we do not operate on a 100% reserve gold standard. We operate on a fractional reserve fiat standard, which is about as far from a 100% reserve gold standard as one can get. The supply of money and credit can be changed in myriad ways - issue of new notes, changing the bank reserve requirements, issue of fictitious bank credit, or what have you. When the rampant inflation that inevitably results from political control of the supply of money and credit causes unsustainable investment in production or consumption, the seeds of the inevitable bust have been sown. The stock of productive capital is depleted over time, and the malinvestments caused by inflation consume more of the productive structure. The longer malivestments happen, the more damaging and painful the reallocation of capital back to productive purposes becomes.

Our collective problem is that we are currently at the end of an extremely long inflationary boom. There have been previous corrections since the advent of the boom in 1913. But the simple truth is that the tendancy to boom has never really been eliminated, because as Hulsmann points out society is incredibly unwilling to eliminate the mechanism that creates the inflation (government control of the supply of money and credit). Perhaps this bust will not end in Mises “destruction of the monetary system involved,” but hope for the best and prepare for the worst. All of the monetary systems that I am aware of are fighting each other to be the first to destroy themselves, and they are all interrelated.

I don’t believe any definition other than “inflation - an increase in the supply of money or credit” and “deflation - a decrease in the supply of money or credit” is necessary. I also believe that to use any other definition is misleading and plays into the hands of the apologists for statism. Take back the correct definition!!

12

Oops! Yes you are right. I have fixed it.

Not that I know of. It is just what I have come to learn from studying Austrian Economics (AE).

The reason is, that the services the government provides are generally worthless. Governments do not generate wealth, they consume wealth.

The U.S. government is spending trillions of dollars. This is all resources that the private sector now does not have access to. And since the private sector is the only one that produces goods and services that are valuable (we know this because people willingly buy them), that means there are fewer people employed in producing goods and services people want (i.e. lower supply). Let’s say that the government employs half of the population. This means that there are half as many valuable goods and services being produced. Given a lower supply, this means the price will increase, given the law of supply and demand. It will not necessarily be twice as high, but the price will be higher, for all goods and services produced in the private sector. And since the government sector cannot be measured, the private sector is the only one that matters.

13

I am sorry, but this is wrong. Inflation is a general increase in the price of goods and services. This increase can come about because of an increase in the supply of money, or a decrease in the overall supply of goods and services. When the government steals wealth, there is a decrease in the overall supply of goods and services, resulting in an increase in the price of goods and services.

Now, the market has the general effect of lowering prices, because it becomes more and more efficient. So you may not actually see an increase in the cost of goods and services, but instead you may not see a decrease. This also would be inflatiion, since the prices are higher than they would normally be.

14

there are lots of different infaltions. ‘grade inflation’ ‘weight inflation through the intake of food’ ‘price inflation’ ‘money supply inflation’, feel free to make up your own inflation. now austrians use Inflation to stand in for money supply inflation, this is the original meaning of the term in economics, and plenty of austrian arguments are written using this terminology and they make sense when you think of money supply inflation, (the arguments would be less good if you suppose them to be talking about price inflation). now the neoclassical for their own reasons decided to use Inflation to stand in for price inflation, and their arguments are nonsense no matter how you interpret their Inflation :slight_smile: I should think they adopted inflation is price inflation, because its a good device to use to muddy the water, you can make all sorts of fallacies about oil pushing up the general price level (impossible) and you can make these fallacies without even talking about the money supply (ridiculous).

15

Read Henry Hazlitt’s definition.

16

There is no concept of ‘demand for money’? What are you talking about? What is increasing one’s cash balance or hoarding if not ‘demand to hold money’?

But I’ll give you a shorter and better definition of inflation:

Increase in money supply. Period!

What does ‘demand’ have to do with the definition of inflation?

17

Inflation is a general* decrease in the per unit purchasing power of a currency/store of value[ i.e.a loss of purchasing power] relative to previous purchasing power.

  • “general” i.e. a decrease as measured against a broad range of consumer goods and services [more units of currency are now needed to buy the same amount of most goods/services, relative to previous numbers of units required to buy those same goods/services].
18

for you inflation is a decrease in the pre unit purchasing power of the currency? this is less good than confusing money and price inflation. as you dont even have an increasing term, but a decreasing term.

if the money supply contracted, and output of goods and services fell yet more dramtically, you think inflation is a good label for that?

19

Well, some individuals might want to ‘increase their cash balances’ - still there’s no aggregate demand for money that makes sense or is relevant to defining inflation.

Yes. Although there are some differences between increasing the supply of commodity money and increasing the supply of ‘other’ kinds of monies…

Dunno. People usually don’t demand to have their money devalued, do they ?

20

It is incredible you are debating about the definition of inflation. It is impossible by definition.

We have seen how many are used out there, so pick whichever suits your research.