What is Inflation?

When somebody says, “We have high inflation,” today, they generally mean prices are rising as measured by the Consumer Price Index (CPI).

But this isn’t an accurate definition of inflation.

Historically, economists defined inflation as an increase in the amount of money and credit — or put another way, an expansion in the money supply.

Economist Ludwig von Mises defined it this way in his essay “Inflation: An Unworkable Fiscal Policy.”

“Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check.”:

A 1970s dictionary yields a similar definition.

“A sharp increase in the amount of money and credit causing advances in the price level.”

Notice that the definition mentions rising prices, but only as a symptom of inflation. Inflation itself is defined as “an increase in the amount of money and credit.”

Over the years, the government, along with its apologists in the corporate media and academia, altered the definition to suit government purposes. The standard definition of inflation bandied about today is nothing more than government propaganda.

Mises explains the problem with this change in definitions.

“People today use the term `inflation’ to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation. . . . As you cannot talk about something that has no name, you cannot fight it. Those who pretend to fight inflation are in fact only fighting what is the inevitable consequence of inflation, rising prices. Their ventures are doomed to failure because they do not attack the root of the evil. They try to keep prices low while firmly committed to a policy of increasing the quantity of money that must necessarily make them soar. As long as this terminological confusion is not entirely wiped out, there cannot be any question of stopping inflation.”

In other words, the modern definition allows policymakers to shift the blame.

If we use the traditional definition of inflation as an “expansion of the supply of money,” the culprit becomes clear. Who expands the supply of money? It’s the Fed and the federal government. So, if you accurately define inflation, you know exactly who’s to blame. But if the government can fool people into believing that an effect of inflation is inflation, they can blame it on everybody but themselves.