Inflation Correctly Defined and Explained
A Barter-Only Economy If a fisherman trades two fish for a baker's one loaf of bread, that is their rate of exchange. And although their rate of exchange (relative prices) can alter, neither of them can effect inflation. Inflation can only occur with the introduction of the third factor that we call money or currency.
If a drought occurs such that the baker’s output is hobbled thus making the bread more valuable and he demands four fish for a loaf, the baker has raised his relative price to the fisherman’s. But this is not inflation. It is an adjusted rate of exchange.
This barter economic system (courtesy of John Pugsley 40 years ago) provides the fundamental basis of the following points about inflation. As Pugsley said, “Find the people who print the money and you will have the source, the only source, of inflation.”
Contrary to what we are taught by economics coursework, supply-demand has no influence on inflation. And contrary to almost any dictionary definition (and the US Department of Labor), the increase in prices, as poorly measured by the Consumer Price Index (CPI) is NOT the correct or a useful definition of inflation.
[Milton Friedman admitted that production did affect inflation, but that it was a “bit player” and hardly worth mentioning.]
Inflation is ONLY the expansion (and thus devaluation) of the money supply (a la Milton Friedman) which will ultimately, but NOT INSTANTLY, cause a rise in prices as indexed on the CPI. And the CPI is DOWNSTREAM FROM INFLATION. Hence, it is NOT the inflation.
Note: We [probably] cannot measure inflation. We can only look at the economic soup we call the CPI. Inflation is only one of many ingredients blended into the collection of economic forces that affect this soup.
[For instance, deficit spending by the government will cause a reactive and gradual bidding up of prices over a period of many months, sometimes years. Milton Friedman stated that the average time delay BETWEEN an injection of empty money (my word for money not representative of production of goods and services) into the economy by the government AND prices being completely bid up on the street in response to this same injection, is about two years. This delay can be increased substantially. For example, at present, much of the federal Covid-19 relief money paid to the states has yet to be spent by the states in their relief programs.]
A word’s imagery is also a useful part of why to choose it to represent a concept. Inflation is perfect to describe the expansion of the money supply. It is poor imagery for the increase in prices.
We hear of “food inflation” and “energy inflation.” The food does not inflate (or balloon), nor do food prices, but its prices do increase or decrease. Energy does not inflate, nor do energy prices, but its prices go up or down.
Much more instant increases in prices are caused by scarcities created by drought, pestilence, floods, fires, hurricanes, tornadoes, earthquakes, volcanoes, blizzards, immigration, government interference with the production of energy, monopolistic activity, mob activity, pandemic lock-downs, union negotiations, oil cartels, sabotage, supply-chain kinks, vandalism, taxation, immigration, and other means, but price increases due to these causes are NOT inflation!
And price decreases in certain commodities can occur due to boycotts, overproduction, gluts, tax holidays, bumper crops, enhanced manufacturing efficiency, emptying of the strategic oil reserves, but none of this is deflation.
[To be consistent, deflation is the UNspending of the already-spent empty money. This is impossible and represents gibberish. Hence, more gibberish is illustrated with the usage of stagflation.]
Inflation EQUALLY affects the prices of all the commodities indexed on the CPI, so why do some prices increase more than others? And why do some decrease while others increase?
Answer: In addition to the prices being EQUALLY and (perhaps relatively less at present in the US) by inflation, they are more greatly and quickly affected UNEQUALLY by the scarcities and gluts mentioned earlier.
I suspect that this is all kept as a mystery to keep us confused.
[Note: If a government intends to hurt the economy gradually, it inflates the money supply. If more-instant damage is desired, choking off the production of the energy sector is choice. And somewhat like inflation (but separate from inflation), the energy sector strangulation will affect all commodities.]
[On September 25, Senator Mike Lee aligned the time of the recent onset of “inflation” with the inauguration of President Biden. Then he referenced Milton Freidman stating that inflation was only due to government spending. He must have missed the Freidman presentation wherein Freidman explains the lag time between the government deficit spending and experiencing prices rise on the street (CPI).]
[Political pundits, journalists, and officials often will CORRECTLY blame the US federal government for inflation by its expansion of the money supply, then point to the CPI increase as what the government has caused when the money supply expansion only caused part of it (perhaps a large part, perhaps a small part). This is an acute disconnect and illustrates why the conventional definition of inflation—increase in prices—is unworkable.
Also, note that many of these same people authoritatively and repeatable spout that “inflation is too much money chasing too few goods.” This smacks of scarcity being a part of inflation which the Pugsley barter-only demo thoroughly disproves.]