Inflation is the expansion and/or increase in the money supply and/or currency. That’s it, nothing more.
Often times, inflation is thought of as an increase in prices, but this is not quite correct. Price increases are the most likely EFFECT and CONSEQUENCE of inflation, but not the cause. The cause is the increase in the money supply. It will often be said that there is no inflation because consumer prices haven’t risen so rapidly or dramatically. The FED many times takes this position, probably as a way to hide the fact the there is indeed inflation, of the money supply, of which the FED is causing and of which the FED would like the public to be unaware. If the public does not equate inflation with increasing the money supply, but rather with price increases only, then it would seem like there is no inflation, but wrongly so.
This is because, as per the theme of this post, inflation is an expansion and/or increase in the MONEY SUPPLY, the only thing the FED can actually directly inflate and set the quantity of, not consumer price levels.
The key point is: only things that anybody can directly affect and fix the quantity of, mainly by increasing it, can be inflated. For example, balloons can be inflated, as can bubbles. In this context of economics, the two things in dispute as to which can be inflated are prices and the money supply; human beings can only affect the quantity of one of those two, and that is the money supply. In the U.S., the Federal Reserve(FED) controls the money supply. although it has always increased and never decreased the U.S. money supply since the days of the Great Depression. In most other countries, their respective central banks have the authority to control and inflate the money supply.
The FED and other central banks can print more paper currency, in order to increase, and thereby inflate, the money supply. The FED nor any other central banks cannot on its own power increase or decrease consumer, or even asset, prices. Ultimately, only buyers, also known as demand, and sellers, also known as supply and/or producers, can determine prices based on mutual agreement and exchange. All that the central banks can do is INFLUENCE, but not directly or solely determine, the price level. Generally, the more the central banks inflate the money supply, the higher the price levels rise and vice-versa.
Upon doing a Bing-search for the definition of inflation, it appears that too many seem to attribute consumer prices as the objects of inflation, when it should be the money supply instead. Examples listed below are the following:
–https://www.thestreet.com/personal-finance/education/what-is-inflation-14695699
–https://www.economicsdiscussion.net/inflation/inflation-types-causes-and-effects-with-diagram/6401
–http://www.businessdictionary.com/definition/inflation.html
–https://www.investopedia.com/terms/i/inflation.asp
–https://www.merriam-webster.com/dictionary/inflation
–https://dictionary.cambridge.org/dictionary/english/inflation
This blog, however, at least points out the changed definition of inflation over time, as in 1983, it is defined correctly by Webster’s New Universal Unabridged Dictionary:
“An increase in the amount of currency in circulation, resulting in a relatively sharp and sudden fall in its value and rise in prices: it may be caused by an increase in the volume of paper money issued or of gold mined, or a relative increase in expenditures as when the supply of goods fails to meet the demand.”
Whereas, the The American Heritage® Dictionary of the English Language, Fourth Edition, Copyright © 2000 Published by Houghton Mifflin Company wrongly defines it as the following:
“A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.“
Inflation can sometimes occur in the absence of dramatic price rises. Typically, in the U.S., when the FED inflates the money supply, the majority of the price hikes go into financial assets, mainly stocks, bonds, derivatives, and real estate. Consumer prices, of things like groceries and gasoline, have also gone up too, but not as much as the financial assets. This is because a far larger volume of money is spent on financial assets, to the tune of trillions, than on consumer goods. Furthermore, the rate at which newly inflated money is spent on financial assets is much more rapid than that of which consumer purchases consequently rise from inflation.
On Wall Street, inflated money that gets almost immediately invested into the various financial assets tends to bring about raises, bonuses, and other forms of salary raises. This pushes financial asset prices to rise far more rapidly than typical consumer prices. This is one big reason why I disagree with Peter Schiff’s position on hyperinflation.