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What exactly is inflation?
We have seen many different definitions of inflation. Is it rising prices? Is it cost push or demand pull? Is it an increase in money or credit? I suppose all of these are at least partially correct. We have also heard that inflation is always and everywhere a monetary phenomenon.
Investopedia defines inflation as:
The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum.
Wikipedia defines it as:
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also a decline in the real value of money—a loss of purchasing power in the medium of exchange which is also the monetary unit of account in the economy. A chief measure of general price-level inflation is the general inflation rate, which is the percentage change in a general price index (normally the Consumer Price Index) over time.
However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.
That is the situation I believe we find ourselves in today. Granted credit is probably being destroyed faster than money is being created which would make an argument for deflation. But at some point the money supply growth will overtake the credit destruction. The question must be asked, will the FED be able to pull the plug in time to prevent inflation from going hyperbolic? History suggests otherwise.
