The only valid meaning for the word consists of an increase in the supply of money. Beware of relying on the CPI to inform you about “general increases in prices.”
What is Inflation, Really?
In economic terms “inflation” means increasing the supply of money.
If you look up the term “inflation” in an economics textbook or dictionary, you will usually find it defined as a general rise in prices. When economists start discussing the causes of these general increases in prices, they refer to things like wage inflation, consumer price inflation, or other types of price inflation.
A rise in the general price level (meaning a generalized increase in the prices of individual products) can, in fact, occur. But, the cause has only a single source: monetary expansion. Without an expansion of the money supply, when the price of one good goes up, the price of some other good or goods must go down.
Rising prices caused by monetary expansion distort the information flow transmitted by the mechanism of prices. The distortions in prices only occur on a good-by-good basis. We can only recognize generalized price increases by comparing arrays of past and present product prices and recognizing that the majority of prices have increased over time. To express “price inflation” in a single statistic like the consumer price index (CPI) amounts to a fraudulent use of statistics. Let me give an hypothetical example to explain:
Consider the following scenario:
- Egg prices increase from $3.25/doz to $4.61/doz, and egg production decreases from 92.6 Billion/eggs/yr to 87.2 Billion/eggs/yr., and
- Bacon prices increase from $6.12/Lb to $7.31/lb, and bacon production increases from 2 Billion/lbs/yr to 3 Billion/lbs/yr.
What would the egg/bacon price index be?
Now consider the validity of an index that “accurately” expresses the price and production volume changes for millions of different products.
The only valid definition of inflation consists of an expansion in the supply of money.
Money expansion causes distortions in market prices. The consumer price index (CPI) does not provide an indication of the impact or magnitude of these price distortions.