I think I understand how new money is created (Central banks' OMOs; fractional reserve banking; etc.). What I do not understand, on a very practical, every day level, is how inflation/money supply increases leads to higher prices.
Is it because people who have taken on cheap credit go and spend everything in a frenzy and businesses raise their prices because their is a perceived increased demand? Or, is it because there is more money in producer goods industries, which bids up the prices of producer goods and these increased costs, in turn, are passed on to consumers??
Like I said, I would like this explained in terms of what really happens in the market - ie. very practical examples.
It seems like this very question was posed just a few days ago. Have a look here and let me know if you need more outside of those resources.
Inflation, the creation of money and/or credit not backed by savings, will eventually lead to higher prices ALL ELSE BEING EQUAL. For example the massive increases in the money supply have not cause massive increases in prices in the USA and EU for a variety of reasons first and foremost is the inclusion of BRIC countries in the world economy. Also there is the reduction of employment and other costs in manufacturing from technology. But even with these effects prices are moving upwards far in excess of what governments are willing to admint. See shadowstats.org for more accurate numbers determined using the methods during the Depression.
Keep in mind that the worst effect of inflation is not increasing prices but that it creates the Business Cycle.