Updated- July 16, 2008
by Tim McMahon, Editor
I often receive letters from students, that demonstrate a fuzzy understanding of inflation and its causes. Unfortunately, I often get the same type letters from teachers and business people too! It seems that people often confuse the cause of inflation with the effect of inflation and unfortunately the dictionary isn't much help. As you can see in my article What is the Real Definition of Inflation? the modern definition of inflation is "A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money..." In other words according to this definition inflation is things getting more expensive. But that is really the effect of inflation not inflation itself. The American Heritage® Dictionary of the English Language, Fourth Edition, Copyright © 2000 Published by Houghton Mifflin Company goes on to say: ...caused by an increase in available currency and credit beyond the proportion of available goods and services. In other words, the common usage of the word inflation is the effect that people see. When they see prices in their local stores going up they call it inflation. But what is being inflated? Obviously prices are being inflated. So this is actually "price inflation". Price inflation is a result of "monetary inflation".
Or "monetary inflation" is the cause of "price inflation". So what is "monetary inflation" and where does it come from? "Monetary inflation" is basically the government figuratively cranking up the printing presses and increasing the money supply. In the old days that was how we got inflation. The government would actually print more dollars. But today the government has much more advanced methods of increasing the money supply. Remember, "monetary inflation" is the "increase in the amount of currency in circulation". But how do we define currency in circulation? Is it just the cash in our pockets? Or does it include the money in our checking...
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