Understanding inflation - Sm Posted: May 20th, 2019 - 8:56 pm
By Ellis Winningham
And another thing...
Inflation is not just spending exceeding real production capacity. Firstly, it has to persistently exceed real production capacity. And secondly, that is but one cause of inflation called “demand-pull”. There’s also “cost-push” which is a supply issue. And another thing…
Inflation is not “too much money chasing too few goods”. You can forget that silly line forever. Toss it in the dust bin. Neither money, or money creation can cause inflation. There are also different forms of inflation:
- Stable inflation
- Accelerating inflation (This is the form of inflation the mainstream is talking about when they say “inflation” in connection to government spending)
– Hyperinflation
- Decelerating inflation
More items that you need to understand:
1.) Inflation is not the increase in the price of one particular good. For instance, if the price of eggs goes from $2 to $3.50, that is not inflation.
2.) Inflation is defined as:
The CONTINUOUS rise in the price level over the period of time that the price level rise is observed.
Note the word “continuous”, the phrase, “over the period of time”, and the word “observed”. These things are critical. To even know if an inflationary episode is occurring, we need to be observing over a particular time period, and during that time period. the price level increase must be continuous. For example:
August: 1%
September: 2%
October: 3%
The following statements are not definitions of inflation:
“When the price of goods and services keeps increasing”
“When the price level goes up.”
“When the price of goods keeps going up.”
“Too much money chasing too few goods.” (This one in particular is worth mentioning again!)
“When the government gives people too much money when we’re already at full employment.” (This is just a restatement of Milton Friedman’s ‘Too much money chasing too few goods’, and it is still wrong. Forget about money!)
Lastly, and most importantly…
Because the currency issuer is the currency monopolist, it alone is the price-setter. Therefore, inflation/deflation are functions of the national government’s price-setting capacity (and regulatory authority).
Inflation is not just spending exceeding real production capacity. Firstly, it has to persistently exceed real production capacity. And secondly, that is but one cause of inflation called “demand-pull”. There’s also “cost-push” which is a supply issue. And another thing…
Inflation is not “too much money chasing too few goods”. You can forget that silly line forever. Toss it in the dust bin. Neither money, or money creation can cause inflation. There are also different forms of inflation:
- Stable inflation
- Accelerating inflation (This is the form of inflation the mainstream is talking about when they say “inflation” in connection to government spending)
– Hyperinflation
- Decelerating inflation
More items that you need to understand:
1.) Inflation is not the increase in the price of one particular good. For instance, if the price of eggs goes from $2 to $3.50, that is not inflation.
2.) Inflation is defined as:
The CONTINUOUS rise in the price level over the period of time that the price level rise is observed.
Note the word “continuous”, the phrase, “over the period of time”, and the word “observed”. These things are critical. To even know if an inflationary episode is occurring, we need to be observing over a particular time period, and during that time period. the price level increase must be continuous. For example:
August: 1%
September: 2%
October: 3%
The following statements are not definitions of inflation:
“When the price of goods and services keeps increasing”
“When the price level goes up.”
“When the price of goods keeps going up.”
“Too much money chasing too few goods.” (This one in particular is worth mentioning again!)
“When the government gives people too much money when we’re already at full employment.” (This is just a restatement of Milton Friedman’s ‘Too much money chasing too few goods’, and it is still wrong. Forget about money!)
Lastly, and most importantly…
Because the currency issuer is the currency monopolist, it alone is the price-setter. Therefore, inflation/deflation are functions of the national government’s price-setting capacity (and regulatory authority).
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