"Inflation is not just pricing and interest rates are not just inflation"

[davidmich]

Can anyone elaborate more on this comment.

The general definitions for inflation are :

This is how Investopedia defines inflation:

The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.

Terms Beginning With 'I'…#ixzz1xdMncUeM
“Inflation has been defined as a process of continuously rising prices or equivalently, of a continuously falling value of money.”

http://www.bls.gov/cpi/cpifaq.htm

Iwould like to find a more comprehensive definition of inflation. Idon’t think it fully defines inflation but I may be wrong. I would appreciate your help with this.
Thanks.

[Flyer]

There’s the common definition of inflation, and then there’s the correct definition.

Almost everybody thinks that inflation is rising prices. I see that Investopedia falls into that trap. In reality, the two parts of their definition should be switched around.

Now sometimes prices do rise because of increased demand, but that’s not inflation.

Consider–what’s a synonym for blowing up a balloon? Inflating it. That’s what inflation is–an increase in the money supply. Dollars are like everything else–if you increase the supply, without changing anything else, the less each individual dollar is worth.

Here’s an example. Suppose that you and a neighbor each have $10. Each of you can afford to spend exactly half of your money supply on bread. So a loaf of bread costs $5. Now somebody else (taking on the role of a central bank, or government, whichever is relevant) comes along and doubles the money supply for both you and your neighbor. Presto–the price of bread goes to $10. The value of the bread did not change, but rather the value of each dollar.

In other words, rising prices are not inflation, but simply a sign of inflation.

[davidmich]

@Flyer

There’s the common definition of inflation, and then there’s the correct definition.

Almost everybody thinks that inflation is rising prices. I see that Investopedia falls into that trap. In reality, the two parts of their definition should be switched around.

Now sometimes prices do rise because of increased demand, but that’s not inflation.

Consider–what’s a synonym for blowing up a balloon? Inflating it. That’s what inflation is–an increase in the money supply. Dollars are like everything else–if you increase the supply, without changing anything else, the less each individual dollar is worth.

Here’s an example. Suppose that you and a neighbor each have $10. Each of you can afford to spend exactly half of your money supply on bread. So a loaf of bread costs $5. Now somebody else (taking on the role of a central bank, or government, whichever is relevant) comes along and doubles the money supply for both you and your neighbor. Presto–the price of bread goes to $10. The value of the bread did not change, but rather the value of each dollar.

In other words, rising prices are not inflation, but simply a sign of inflation.

Thanks. So what would you add to the quotes definitions to make them more comprehensive? It seems that the common textbook definitions of inflation are inadequate.

[Spectre_of_Pithecanthropus]

In this regard I wonder if it’s correct to denote as inflation a scenario in which the price of a commodity such as crude oil spiking for perfectly valid supply side reasons.
There and then, my understanding is that the money supply should not need to be expanded because the higher prices paid for petrol product will be offset by a corresponding reduction in spending on other goods.

[Snarky_Kong]

@Flyer

There’s the common definition of inflation, and then there’s the correct definition.

Almost everybody thinks that inflation is rising prices. I see that Investopedia falls into that trap. In reality, the two parts of their definition should be switched around.

Now sometimes prices do rise because of increased demand, but that’s not inflation.

Consider–what’s a synonym for blowing up a balloon? Inflating it. That’s what inflation is–an increase in the money supply. Dollars are like everything else–if you increase the supply, without changing anything else, the less each individual dollar is worth.

Here’s an example. Suppose that you and a neighbor each have $10. Each of you can afford to spend exactly half of your money supply on bread. So a loaf of bread costs $5. Now somebody else (taking on the role of a central bank, or government, whichever is relevant) comes along and doubles the money supply for both you and your neighbor. Presto–the price of bread goes to $10. The value of the bread did not change, but rather the value of each dollar.

In other words, rising prices are not inflation, but simply a sign of inflation.

So, if another person comes in that also has $10 and would spend half on bread, the money supply increased, but prices stayed the same. There’s no inflation.

[Exapno_Mapcase]

@Flyer

There’s the common definition of inflation, and then there’s the correct definition.

Almost everybody thinks that inflation is rising prices. I see that Investopedia falls into that trap. In reality, the two parts of their definition should be switched around.

Now sometimes prices do rise because of increased demand, but that’s not inflation.

Consider–what’s a synonym for blowing up a balloon? Inflating it. That’s what inflation is–an increase in the money supply. Dollars are like everything else–if you increase the supply, without changing anything else, the less each individual dollar is worth.

Here’s an example. Suppose that you and a neighbor each have $10. Each of you can afford to spend exactly half of your money supply on bread. So a loaf of bread costs $5. Now somebody else (taking on the role of a central bank, or government, whichever is relevant) comes along and doubles the money supply for both you and your neighbor. Presto–the price of bread goes to $10. The value of the bread did not change, but rather the value of each dollar.

In other words, rising prices are not inflation, but simply a sign of inflation.

This can be quickly proved or refuted. Look at money supply charts.

You don’t see any correlation between money supply, year-to-year change in money supply, or monetary base and inflation. None.

[Spectre_of_Pithecanthropus]

@Spectre_of_Pithecanthropus

In this regard I wonder if it’s correct to denote as inflation a scenario in which the price of a commodity such as crude oil spiking for perfectly valid supply side reasons.
There and then, my understanding is that the money supply should not need to be expanded because the higher prices paid for petrol product will be offset by a corresponding reduction in spending on other goods.

This looks horrible, and is what I get for trying to post from a phone.

[davidmich]

@Spectre_of_Pithecanthropus

This looks horrible, and is what I get for trying to post from a phone.

I found this nice summary of the schools of thought on what exactly inflation is. It seems like no one can settle on an adequate definition.

http://qando.net/archives/002232.htm

[Darth_Panda]

Inflation is the reduction of the real purchasing power of a nominal amount of currency.

[Hellestal]

@davidmich

It seems like no one can settle on an adequate definition.

Nonsense.

On the one hand, you have the economics profession as it’s currently practiced. They define inflation as a change in the general price level. That includes every popular textbook, every reputable economist, every relevant government agency, every major business newspaper – and not just in English, but worldwide. The entire field, across the entire globe, has settled on a single adequate definition as a change in the general price level. That is how the experts actually define it.

On the other hand, you have a handful of commenters on the internet who prefer the definition that’s 70 years out-of-date.

There is no dispute here. The correct definition is the one professionals actually use around the world.

[davidmich]

@Hellestal

Nonsense.

On the one hand, you have the economics profession as it’s currently practiced. They define inflation as a change in the general price level. That includes every popular textbook, every reputable economist, every relevant government agency, every major business newspaper – and not just in English, but worldwide. The entire field, across the entire globe, has settled on a single adequate definition as a change in the general price level. That is how the experts actually define it.

On the other hand, you have a handful of commenters on the internet who prefer the definition that’s 70 years out-of-date.

There is no dispute here. The correct definition is the one professionals actually use around the world.

Thanks Hellestal. That puts the issue to rest as far as I’m concerned.