"Inflation"- A Better Definition?

[onebornfreedotblogsp]

In another thread, the thread starter asked for the “most useful” “good, compact” , definition of the word “inflation” .

Various definitions were suggested, and the thread starter finally picked one which states:

" Inflation is an increase in the supply of money or credit. …Deflation is a decrease in the supply of money or credit. "

I maintain that this definition [actually two] is woefully wrongheaded, for the simple reason that it describes an action, not an economic condition or state of affairs, which is what inflation actually is.

Although it may be narrowly, grammatically and technically correct , because one can say, for example: " they are “inflating” [i.e. increasing] the money supply " - and that is OK as far as it goes, and may even be all well and good if you are satisfied merely with a play on words [i.e “inflating” for “increasing”] - but that is all that the phrase "Inflation is an increase in the supply of money or credit. " amounts to, in my opinion- it is nothing more than a misleading play on words that is actually counterproductive.

Here is what I believe is a more truthful [and therefor much more useful] definition of the term “inflation” :

“Inflation”: is an economic condition characterized by an “across the board” [i.e. general] rise in prices for most goods and services , due to the erosion of value [purchasing power] of each unit of the currency unit in use.

Deflation?

And since the chosen definition in the other thread went on to make just as wrongheaded a statement regarding deflation [i.e. “Deflation is a decrease in the supply of money or credit”], a definition I assume the thread starter also must agree with, I will offer what I believe is a correct, and therefor much more useful, definition of the term “deflation” here as well:

Deflation : is an economic condition characterized by falling prices of most goods and services “across the board” [i.e. general] due to the rise in value [purchasing power] of each unit of currency in general use.

[wilderness]

Using your definitions here. How does inflation happen? What is that event called? Same for deflation. What is the name of the event causing deflation?

[onebornfreedotblogsp]

@wilderness

Using your definitions here. How does inflation happen? What is that event called? Same for deflation. What is the name of the event causing deflation?

Neither definition are an attempt to explain why I might think either circumstance occurs - such theoretical explanations are irrelevant for the purposes of defining what something is, or is not. What you or I or anyone else might subjectively believe causes the effects being defined, should have no bearing on defining those effects, and must be excluded, if those definitions are to remain unbiased and be of any practical value.

The only thing that the definition should do is accurately describe the state of affairs that exist that the word is supposed to convey.

Never the less,to broadly answer your question.

Neither inflation or deflation are the result of any single event. They are the net result of millions upon millions of subjective valuations [i.e. events] by individuals regarding the current and future value of the medium of exchange in general use at that time, when measured against other “real” goods by those individuals.

[Juan]

well…

@Human Action - XVII. - 6. Cash-Induced and Goods-Induced Changes in Purchasing Power

Inflation and Deflation; Inflationism and Deflationism

The notions of inflation and deflation are not praxeological concepts. They were not created by economists, but by the mundane speech of the public and of politicians. They implied the popular fallacy that there is such a thing as neutral money or money of stable purchasing power and that sound money should be neutral and stable in purchasing power. From this point of view the term inflation was applied to signify cash-induced changes resulting in a drop in purchasing power, and the term deflation to signify cash-induced changes resulting in a rise in purchasing power. [p. 423]

However, those applying these terms are not aware of the fact that purchasing power never remains unchanged and that consequently there is always either inflation or deflation. They ignore these necessarily perpetual fluctuations as far as they are only small and inconspicuous, and reserve the use of the terms to big changes in purchasing power. Since the question at what point a change in purchasing power begins to deserve being called big depends on personal relevance judgments, it becomes manifest that inflation and deflation are terms lacking the categorial precision required for praxeological, economic, and catallactic concepts. Their application is appropriate for history and politics.

[onebornfreedotblogsp]

@Juan

well…

@Human Action - XVII. - 6. Cash-Induced and Goods-Induced Changes in Purchasing Power

Inflation and Deflation; Inflationism and Deflationism

The notions of inflation and deflation are not praxeological concepts. They were not created by economists, but by the mundane speech of the public and of politicians. They implied the popular fallacy that there is such a thing as neutral money or money of stable purchasing power and that sound money should be neutral and stable in purchasing power. From this point of view the term inflation was applied to signify cash-induced changes resulting in a drop in purchasing power, and the term deflation to signify cash-induced changes resulting in a rise in purchasing power. [p. 423]

However, those applying these terms are not aware of the fact that purchasing power never remains unchanged and that consequently there is always either inflation or deflation. They ignore these necessarily perpetual fluctuations as far as they are only small and inconspicuous, and reserve the use of the terms to big changes in purchasing power. Since the question at what point a change in purchasing power begins to deserve being called big depends on personal relevance judgments, it becomes manifest that inflation and deflation are terms lacking the categorial precision required for praxeological, economic, and catallactic concepts. Their application is appropriate for history and politics.

I agree, but what is your point?

[Juan]

No particular point except that there seems to be a wide variety in definitions…

[WisR]

@onebornfreedotblogspotdotcom

Neither inflation or deflation are the result of any single event. They are the net result of millions upon millions of subjective valuations [i.e. events] by individuals regarding the current and future value of the medium of exchange in general use at that time, when measured against other “real” goods by those individuals.

In the short run, sure, inflation or deflation is determined mainly by subjective valuations of individuals and the demand and supply of all goods (including money, however the demand for it is defined). But what about in the long run?

The only way for prices to continually rise is with increases in the money supply.

Defining inflation as the symptom of rising prices ignores the cause, and the only possible cause of prices continually rising by large amounts over long periods of time is inflating the money supply. It confuses the causes of long term high inflation of prices with short term causes.

The reason to define inflation as an increase in the money supply is precisely to make it clear to as many people as possible that the only way any money can lose 98% of its value ($20 used to buy an ounce of gold, now it takes almost $1000) is through continual increases in the money supply. If you define inflation as increases in prices, it becomes much less clear that it is the federal reserve that has destroyed the value of the dollar over the past century.

[onebornfreedotblogsp]

@WisR

@onebornfreedotblogspotdotcom

Neither inflation or deflation are the result of any single event. They are the net result of millions upon millions of subjective valuations [i.e. events] by individuals regarding the current and future value of the medium of exchange in general use at that time, when measured against other “real” goods by those individuals.

In the short run, sure, inflation or deflation is determined mainly by subjective valuations of individuals and the demand and supply of all goods (including money, however the demand for it is defined). But what about in the long run?

The only way for prices to continually rise is with increases in the money supply.

Defining inflation as the symptom of rising prices ignores the cause, and the only possible cause of prices continually rising by large amounts over long periods of time is inflating the money supply. It confuses the causes of long term high inflation of prices with short term causes.

The reason to define inflation as an increase in the money supply is precisely to make it clear to as many people as possible that the only way any money can lose 98% of its value ($20 used to buy an ounce of gold, now it takes almost $1000) is through continual increases in the money supply. If you define inflation as increases in prices, it becomes much less clear that it is the federal reserve that has destroyed the value of the dollar over the past century.

It should not the purpose of definitions to infer reasons as to what caused the condition described, as far as I can see.

As i said before:

"Neither definition are an attempt to explain why I might think either circumstance occurs - such theoretical explanations are irrelevant for the purposes of defining what something is, or is not. What you or I or anyone else might subjectively believe causes the effects being defined, should have no bearing on defining those effects, and must be excluded, if those definitions are to remain unbiased and be of any practical value

The only thing that the definition should do is accurately describe the state of affairs that exist that the word is supposed to convey."

Although I understand what you are trying to say, using the current vs old price of gold as an illustration is overly simplistic , very misleading, and leads to dangerous assumptions if savings/investment decisions are involved .

Finally, the price[value] of money in the marketplace, as with anything else, is always " determined mainly by subjective valuations of individuals" , i.e the demand [or none-demand, for the supply of money, at any point in time, short to long term. That is a fundamental principle of austrian economic theory as I understand it.

So yes, increasing the money supply can devalue the unit of exchange under certain circumstances, but , no, it is not an automatic “given”, ultimately, final price/value of money must depend on the interactions of both supply and demand factors.

[Spideynw]

Inflation is a general increase in the price of all goods and services. Period. If Austrians cannot get this through their heads, they are going to have a very difficult time communicating with 99% of the population.

[nirgrahamUK]

Spidey, im afraid if you cant get it in your head that perfectly good words are mistreated and abused for the befowlment of clear thinking for the benefit of court economists, hack politicians and third rate journalists, then … something bad…

Im going with Hazlitt on this.

@Henry Hazlitt

What Inflation Is

No subject is so much discussed today—or so little understood—
as inflation. The politicians in Washington talk of
it as if it were some horrible visitation from without, over
which they had no control—like a flood, a foreign invasion,
or a plague. It is something they are always promising to
“fight”—if Congress or the people will only give them the
“weapons” or “a strong law” to do the job.

Yet the plain truth is that our political leaders have
brought on inflation by their own money and fiscal policies.
They are promising to fight with their right hand the conditions
brought on with their left.

Inflation, always and everywhere, is primarily caused by
an increase in the supply of money and credit. In fact,
inflation is the increase in the supply of money and credit.

If you turn to the American College Dictionary, for example,
you will find the first definition of inflation given as follows:
"Undue expansion or increase of the currency of a country,
esp. by the issuing of paper money not redeemable in specie."
In recent years, however, the term has come to be used

in a radically different sense. This is recognized in the
second definition given by the American College Dictionary:
“A substantial rise of prices caused by an undue expansion
in paper money or bank credit.” Now obviously a rise of
prices caused by an expansion of the money supply is not
the same thing as the expansion of the money supply itself.
A cause or condition is clearly not identical with one of
its consequences.

The use of the word “inflation” with these
two quite different meanings leads to endless confusion.
The word “inflation” originally applied solely to the
quantity of money. It meant that the volume of money was
inflated, blown up, overextended. It is not mere pedantry
to insist that the word should be used only in its original
meaning. To use it to mean “a rise in prices” is to deflect
attention away from the real cause of inflation and the real
cure for it.

[Jon_Irenicus]

Inflation is a general increase in the price of all goods and services. Period. If Austrians cannot get this through their heads, they are going to have a very difficult time communicating with 99% of the population.

Actually, the original definition of the term is the ones the Austrians use. If the “mainstream” cannot get this through its head, it’s going to have a very hard time comprehending economics…

[Spideynw]

Google Search

“a general and progressive increase in prices; “in inflation everything gets more valuable except money””

http://www.investorwords.com/2452/inflation.html

“The overall general upward price movement of goods and services in an economy”

Inflation

“In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.”

http://useconomy.about.com/od/pricing/f/Inflation.htm

“Inflation is when prices continue to creep upward”

This was just the first four results from Google.com searching for “inflation definition”.

I am pretty secure in saying that this is what 99% of the population thinks “inflation” is defined as. Now, if you want to talk about the causes, great. But expansion of the supply of money is not the only way to cause inflation, as I have already explained, as such, that cannot be the definition of inflation.

Prices can go up if demand increases or if supply decreases. Expansion of the money supply only explains the demand side of things, not the supply side.

[Spideynw]

@Jon Irenicus

Actually, the original definition of the term is the ones the Austrians use. If the “mainstream” cannot get this through its head, it’s going to have a very hard time comprehending economics…

And expansion of the supply of money is not the only way to cause an increase in the general price of all goods and services. So the Austrians are wrong if this is what they think.

[nirgrahamUK]

Spidey, you have noticed that the everday term thrown around by the lay differ in meaning than the jargon and correct useage of those with specialist knowledge in the field.

are you surprised that Misesian ‘action’ is spelt the same as ‘action’ in the common sense, and yet the two are distinct?

[nirgrahamUK]

google gives 6million hits for ‘food price inflation’ so does that mean ‘food price increase in the general price of all goods and services’ ? the sentance doesnt even parse.

or rather; is it just used as a colloquial synonym for ‘increase’. so hardly a term of economics when these people use it as they do…

so forgive us Austrians for using economic speech to talk about economic matters in economics forums…

[Spideynw]

@nirgrahamUK

Spidey, you have noticed that the everday term thrown around by the lay differ in meaning than the jargon and correct useage of those with specialist knowledge in the field.

are you surprised that Misesian ‘action’ is spelt the same as ‘action’ in the common sense, and yet the two are distinct?

I am sorry, I have no idea what you are trying to get at here.

[Jon_Irenicus]

And expansion of the supply of money is not the only way to cause an increase in the general price of all goods and services. So the Austrians are wrong if this is what they think.

No, it isn’t, a fall in demand for money I assume can also cause it, still meaning that the supply is inflated relative to demand… What’s this got to do with inflation being the actual rise in prices? I don’t care if the “mainstream” chooses to define it as the effect rather than the cause of the phenomenon. It would do well to learn some economics. Nothing other than a change in the value of the monetary unit could cause general price increases…

[Spideynw]

@Jon Irenicus

Nothing other than a change in the value of the monetary unit could cause general price increases…

Wrong. A drop in the supply of goods and services would also cause a general price increase.

[Spideynw]

@nirgrahamUK

so forgive us Austrians for using economic speech to talk about economic matters in economics forums…

You are using Austrian speech to talk about economic matters on an economics forum. It does not mean it is correct.

[Harry_Felker]

@Spideynw

@Jon Irenicus

Nothing other than a change in the value of the monetary unit could cause general price increases…

Wrong. A drop in the supply of goods and services would also cause a general price increase.

I think what Jon means is all prices everywhere, not of a specific good…

Unless you are making the claim that all goods and services could simultaneously drop…

[;)]