no sign of inflation???

Posted on: December 18, 2018 at 08:33:17 CT

Is inflation about price rises?

The fundamental problem here is a failure to define the problem properly. For example, the definition of human action is not that people are engaged in all sorts of activities, but that they are engaged in purposeful activities--purpose gives rise to an action.

Similarly, the essence of inflation is not a general rise in prices but an increase in the supply of money, which in turns sets in motion a general increase in the prices of goods and services.

Consider the case of a fixed money supply. Whenever people increase their demand for some goods and services, money will be allocated toward other goods. Thus, the prices of some goods will increase--i.e., more money will be spent on them--while the prices of other goods will fall--i.e., less money will be spent on them.

If the demand for money increases against goods and services, there will be a general fall in prices. In order for an economy to experience a general rise in prices, there must be an increase in the money stock. With more money and no change in money demand, people can now allocate a greater amount of money for all goods and services.

From this we can conclude that inflation is a general increase in the money supply.

As Mises explained in his essay "Inflation: An Unworkable Fiscal Policy":

Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term `inflation' to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation. . . . As you cannot talk about something that has no name, you cannot fight it. Those who pretend to fight inflation are in fact only fighting what is the inevitable consequence of inflation, rising prices. Their ventures are doomed to failure because they do not attack the root of the evil. They try to keep prices low while firmly committed to a policy of increasing the quantity of money that must necessarily make them soar. As long as this terminological confusion is not entirely wiped out, there cannot be any question of stopping inflation."

When inflation is seen as a general rise in prices, then anything that contributes to price increases is called inflationary. It is no longer the central bank and fractional-reserve banking that are the sources of inflation, but rather various other causes. In this framework, not only does the central bank have nothing to do with inflation, but, on the contrary, the bank is regarded, against all evidence, as an inflation fighter.

Thus, a fall in unemployment or a rise in economic activity is seen as a potential inflationary trigger which therefore must be restrained by central-bank policies. Some other triggers, such as rises in commodity prices or workers wages, are also regarded as potential threats and therefore must always be under the watchful eye of the central bank.

a selection from https://mises.org/library/defining-inflation