In a Free Economy, Prices Would be Going down, Not Up

Source: Mises Wire.

The article makes a profoundly useful observation about the nature of inflation. To an economist, inflation is an increase in the supply of money in relation to the supply of goods. Non-economists routinely get this wrong by assuming that inflation consists of higher prices.

The difference is important, because higher prices can occur for any number of reasons that have nothing to do with the supply of money (e.g., bad weather). It is also important for the reason the author states: All else being equal, prices logically should decline over time as better technology and process improvements accumulate.

A further subtlety — possibly the most important one — is that government policies which aim to control prices actually have nothing to do with real inflation, but can fool a credulous public that doesn’t understand the jargon. As the article points out, the Federal Reserve uses the consumer price index as a factor in deciding whether to increase or decrease the money supply. But because there is a time lag between the occurrence of a new money supply level and any new price or CPI effects that may result, the Fed can create inflation while pretending not to.

Right now, for example, the CPI is at 6.2%, the highest in more than 30 years. At the same time, the Biden administration wants to create trillions of dollars in new spending. If successful, the result will be to add monetary inflation to price inflation — a risky proposition to say the least, since monetary inflation tends to become price inflation.

2 thoughts on “In a Free Economy, Prices Would be Going down, Not Up

  1. So far, the main reason we are seeing higher prices, “inflation” for the consumer, is the still log jammed supply chains for many critical parts both here and globally. Plus, consumers have pent up monies they are trying to spend.

    So yes, supply shortages and plenty of money in circulation.

    Some economists are seeing a loosening of the supply chains by spring and that should help from that side of the equation.

    Liked by 1 person

    1. RE: “So yes, supply shortages and plenty of money in circulation.”

      Consumers trying to spend “pent up monies” isn’t quite the same thing as monetary inflation. The “pent up” money consumers have was previously created and counts as part of the current money supply. The new money we expect government to create will actually increase the money supply. That’s the thing to be aware of — because, if price inflation doesn’t abate as you suggest, it will be exacerbated by the coming monetary inflation.

      Like

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