Help! In a Debate Over the Definition of Inflation

[MacFall]

@meambobbo

I think the most common usage of inflation (like you’ll hear on TV) is a general rise in prices. I think this is how we should use it.

I don’t. The Keynesians corrupted the word for the purposes of their agenda. I say we reclaim it.

[Forsmant]

Inflation does not necesalrily increase the price of all goods. If a good is manufatured at a rate that is faster than the rate of monetary inflation, that good will actually get cheaper. The price of electronics is a great example of prudoction out pacing money supply expansion. There are an awful lot more electronics available now then there was in the 1970’s

Defining inflation as only increasing prices is an incompete and vague definition. Prices rise for and fall for many reasons, including inflation. Inflation is an increase in the amount of money. Deflation is the decrease in the supply of money.

[meambobbo]

Maybe we should call them Inflation and inflation, one state caused, one naturally caused.

[Paul]

@meambobbo

As such, inflation can occur due to factors other than expanding the money supply, such as sharp increases in oil prices rippling through the whole economy.

Where does the extra money come from? Say there were $x spent one year throughout the economy, and the next year the price of oil tripled; there’re still only $x to be spent, so whatever prices increase in response to the oil price, other things must decrease in price, and the “average price of everything” (what you’re calling “inflation”) can’t change! The only way it can increase is if there are more dollars in the market.

[meambobbo]

It’s quite simple. Let’s say we’re coming out of a depression and most people desire money, or cash balances, less than during the depression. This instantly produces inflation, as a fixed supply of money with varying demand will reflect its sliding value in the prices of all goods. When it slides down in demand, demand for (other) goods rise.

Rothbard agrees with this principle - applied in reverse. Here is a quote about “gold hoarding,” in which he explains that when people desire holding money, the price of money rises, or the price of goods falls:

In the first place, what has simply happened is an increased demand for money on the part of the miser. As a result, prices of goods fall, and the purchasing power of the gold-ounce rises. There has been no loss to society, which simply carries on with a lower active supply of more “powerful” gold ounces.

It is true that increased prices due to a production shortage at one end of the economy is likely to decrease prices in other areas, whose productive capacities are not harmed by the shortage. Oil, however, is vitally tied to most of our economy. Look at the 70’s-80’s. Incredibly high inflation, incredibly high oil prices, and high monetary expansion; however, the inflation is not as evident during similar monetary expansions, such as in the late 90’s and early 2000’s. Of course, they changed the CPI calculation twice between those two time periods…

The bottom line is this: less total production means higher prices. Higher oil prices means less oil imports…which means less domestic production. Rothbard agrees with the same principle applied in reverse - that in a constant money supply, economic growth means lower prices:

The public memory is short. We forget that, from the beginning of the Industrial Revolution in the mid-18th century until the beginning of World War II, prices generally went down, year after year. That’s because continually increasing productivity and output of goods generated by free markets caused prices to fall. There was no depression, however, because costs fell along with selling prices. Usually, wage rates remained constant while the cost of living fell, so that “real” wages, or everyone’s standard of living, rose steadily.