To understand inflation, one must first understand what money is and how to measure it. Please read What is Money and How Does One Measure It? before attempting to understand what follows.
Unfortunately there is no general agreement as to the definition of inflation. Here are some of the widely used definitions as noted in Inflation: What the heck is it?
Commonly Used Definitions
- Decline in purchasing power of the currency held
- Rising prices in general (essentially the same as #1 although some might disagree)
- Rising consumer prices (CPI)
- Rising producer prices (PPI)
- Rising prices due to expansion of money supply
- Rising prices due to expansion of money supply and credit
- Expansion of money supply
- Expansion of money supply and credit
Four of those definitions refer to money supply. That brings up another issue. When one refers to "money supply" are they talking about M1, M2, MZM, Money AMS (Austrian Money Supply), or simply the amount of money they have in their bank account or wallet at the time of the conversation?
Definitions 5 and 6 refer to "rising prices" yet fail to distinguish between consumer prices, producer prices, or simply prices in general. It seems we could easily add a lot more definitions.
Furthermore, some people make no distinction between money and credit but others do as noted by choices 5 thru 8.
Still others insist than in the fiat world we are in, the web is so tangled between money and credit that this mess is not even worth bothering to figure out. Those folks simply hold gold and wait for "The Crash".
However, it is simply impossible to have a debate about inflation (or anything else) unless the parties can agree on a definition.
Like it or not, we live in a fiat world. Therefore we must attempt to have sound definitions that best describe the fiat world we are in.
The definition I adhere to is: Inflation is a net expansion of money supply and credit, where credit is marked to market. Deflation is the opposite: a net contraction of money supply and
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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