CONSUMER PRICE INFLATION
We hear the term used often, and I’m reasonably certain that most of those who use it think they understand it; but, is the term itself a correct expression for what is meant?
“Price inflation is an increase in the price of a standardized good/service or a basket of goods/services over a specific period of time (usually one year).” …INVESTOPEDIA
By definition then, consumer price inflation seems to be “an increase in the price of a… basket of consumer goods/services over a specific period of time (usually one year).”
Is that inflation? Most people would say yes. At least they would say that it is related to inflation; but can they explain that?
WHAT IS INFLATION?
According to Investopedia, “inflation is the decline of purchasing power of a given currency over time”.
Dictionary.com defines inflation as “a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency.”
Before accepting either of those definitions at face value, let’s look at second definition of the word…
“Inflation is the act of inflating something or the condition of being inflated; as in
“the inflation of a balloon”.
I learned in English never to use the subject word you are defining in the definition of the word. Fortunately, the key to a correct understanding of the term inflation lies in the visual example given… “the inflation of a balloon”.
A better way to say it would be “inflation is the act of injecting air into a balloon”.
When too much air is injected into a balloon, eventually, the balloon will pop. The popping of the balloon is NOT inflation.
Whether the object being inflated is a balloon, football, etc., the act of inflation occurred prior to – and is separate from – the effects (the swelling size and popping of the inflated item) of that action.
Returning to the first definition (financial/economic) then, a reasonable concern should be that the definition of inflation as presented to us, and as understood by most people, is incorrect.
CORRECT DEFINITION OF INFLATION
The correct financial/economic definition of inflation is “the debasement of money by government and central banks”.
The debasement (…”the action or process of reducing the quality or value of something”) occurs by expanding the supply of money and credit.
The debasement of money leads to a loss in purchasing power and results in an increase in the general level of prices for most goods and services.
The loss in purchasing power and the resultant higher prices are the effects of the inflation (debasement of money by government) that has previously occurred.
HIGHER PRICES NOT ALWAYS RESULT OF INFLATION
Misunderstanding of inflation is convenient for politicians and others (central bank chairs).
Without an accurate understanding of the facts above, you are more likely to be persuaded by faulty explanations and finger pointing.
At the very least, the finger pointing will be directed at someone or something else other than the actual culprit/cause.
For example, a great deal has been said about supply chain disruptions and their effects on (consumer) prices. Nevertheless, any higher prices resulting from those disruptions in the supply chain have nothing to do with inflation.
The disruptions include the effects of trying to restart an economy that was forcibly shut down and trying to get back to full speed more quickly than is reasonable. It also includes the effects of economic sanctions, i.e., Russia, oil prices.
With or without the effects of inflation, higher consumer prices resulting from the two examples above are a fact; but, they are not indicative or part of inflation when it is correctly defined.
CONCLUSION – WHAT YOU NEED TO KNOW
1. Inflation is the debasement (expansion of the supply of money and credit) of money by government and central banks.
2. The debasement of money leads to a loss in purchasing power resulting in higher prices (the effects of inflation) for most goods and services.
3. Higher consumer prices can result from issues independent of and not related to inflation and its effects.
Inflation created by governments and central banks is intentional. All governments inflate and destroy their own currencies.
The effects of that inflation are cumulative and unpredictable.
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