Monty Pelerin's World

Economics, Finance and Politics Through The Prism of Classical Liberalism

The False Definition of Inflation

W. C. Fields

W. C. Fields

“How is the human race going to survive now that the cost of living has gone up two dollars a quart? W. C. Fields

“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair. Sam Ewing

Despite the humorous quotes, inflation is a very serious matter, but one not well understood. Confusion regarding the definitions of inflation and deflation are widespread. The correct definition of inflation is, and always has been, an increase in the money supply. Deflation is a decrease in the money supply. (Economists, however, differ as to what is meant by the money supply.) Changes in the money supply eventually reflect in prices. As Walter Wriston observed:  “Rising prices or wages do not cause inflation; they only report it. They represent an essential form of economic speech, since money is just another form of information.”inflation

Today, most people think the definition of inflation is rising prices. Defining inflation as rising prices is akin to defining cancer as a high temperature. Treating the high temperature does not cure the patient, just as “treating” rising prices or wages does not cure the economy. The usual political treatment, wage and price controls, is actually worse than the disease itself.

The false definition of inflation is not accidental. By Orwellian diversion, politicians crafted this definition. For their purposes, redefinition was essential. Defining the disease in terms of its symptoms, enabled blame to be put on “greedy” business, labor and consumers. It absolved the real culprits, the politicians themselves,  and the revisionist definition had secondary benefits. It created both an “enemy” and a “crisis,”  a winning “twofer” for politicians. It created the perfect political situation.

In 1966, Jesse Unruh declared: “Money is the mother’s milk of politics.” Today, “inflation” is the mother’s milk. Politicians are addicted to inflation. It is their modus operandi, their source of power and their route to re-election. Inflation enables “Government as Santa Claus.” It allows vote-buying via “free” programs, not paid for by increased taxation. Inflation enables the myth that Government has money and resources. That myth was sadly on display recently in Detroit where a citizen, when asked where handout money came from, answered: “Obama’s stash.”