Monetary Inflation and Price Inflation

[Brian4Liberty]

Monetary Inflation and Price Inflation
By Robert P. Murphy

This chapter explains the connection between the quantity of money and the height of prices quoted in that money. The chapter therefore deals with the phenomenon of “inflation,” but as we shall see, the very meaning of this word changed during the twentieth century. (For clarity, we will distinguish the two concepts by using the more specific terms “monetary inflation” and “price inflation.”) We will summarize some of the famous episodes of hyperinflation throughout history, showing the disaster that results when governments run the printing press too aggressively.
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Although it is important to recognize that massive price inflation is always the result of massive monetary inflation, there isn’t a stable relationship between the two; it’s not the case that, say, a 50 percent increase in the quantity of money necessarily leads to a 50 percent increase in prices.

Changing Definitions: Monetary Inflation vs. Price Inflation

Nowadays when the media or government officials discuss “inflation” they mean “the increase in consumer prices.” However, originally the term referred to an increase in the quantity of money (including bank credit). Here is how Ludwig von Mises, in a 1951 speech, discusses the semantic change and its implications:

There is nowadays a very reprehensible, even dangerous, semantic confusion that makes it extremely difficult for the non-expert to grasp the true state of affairs. Inflation, as this term was always used everywhere and especially in this country [the United States], means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But 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. It follows that nobody cares about inflation in the traditional sense of the term. 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.​

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Conclusion

Although the term “inflation” nowadays refers to rising consumer prices, historically it referred to increases in the quantity of money. There is a tight connection between monetary inflation and price inflation. Specifically, all examples of hyperinflation in prices involved comparable increases in the money stock.
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More: https://mises.org/wire/monetary-inflation-and-price-inflation

 

[fisharmor]

Good article but it doesn't mention the time delay between inflation of the money supply and price inflation.

I wish I could find something easy to cite, since the internet is full of people who keep calling this "Biden's Inflation" as if it's not the direct result of relief bills signed by Trump over a year ago.

 

[Brian4Liberty]

Good article but it doesn't mention the time delay between inflation of the money supply and price inflation.

I wish I could find something easy to cite, since the internet is full of people who keep calling this "Biden's Inflation" as if it's not the direct result of relief bills signed by Trump over a year ago.

The full article does go into more specifics, but it does not call out recent spending bills.

However, there are examples of large increases in the quantity of money that have not (thus far) resulted in comparable consumer price hikes.

[Emphasis added.]

 

[CaptUSA]

Good article but it doesn't mention the time delay between inflation of the money supply and price inflation.

I wish I could find something easy to cite, since the internet is full of people who keep calling this "Biden's Inflation" as if it's not the direct result of relief bills signed by Trump over a year ago.

You're talking about Nominal Rigidity, or price stickiness. https://en.wikipedia.org/wiki/Nominal_rigidity

There is also the velocity of money that affects price inflation.

The classical theory of inflation, as espoused by the philosopher David Hume and other early thinkers, only considered money growth, which is the increase in the money stock supplied by the government, to be the main cause of inflation, but money growth is a necessary, but not sufficient, condition for inflation. The velocity of money must also be considered, since there can be no inflation unless the money is spent. For instance, if the money supply has expanded, but the people take it home and stuff it in their mattresses, then it will have no effect on inflation.

The simple formula goes like this: money supply × velocity of money = price level × real GDP.

By increasing the money supply, you're not necessarily increasing prices... but when the velocity picks up, the price levels MUST go up or the GDP must go down.
When you increase wages at the lower ends of the economy or simply give these folks money, they will usually spend it quickly to meet their needs, which speeds up the velocity. They are able to take short term advantage of nominal rigidity only to have it come back and bite them in the ass later.

The same doesn't hold true at the upper income levels since most of the money gets reinvested and improves balance sheets - this tends to slow velocity. We're now coming out of a long slow velocity period where we've been increasing the money supply. There's really no good way to stop this now... Raising interest rates would reflect the true risk, but that may have a detrimental impact on GDP.

 

[Brian4Liberty]

You're talking about Nominal Rigidity, or price stickiness. https://en.wikipedia.org/wiki/Nominal_rigidity

There is also the velocity of money that affects price inflation.


The simple formula goes like this: money supply × velocity of money = price level × real GDP.

By increasing the money supply, you're not necessarily increasing prices... but when the velocity picks up, the price levels MUST go up or the GDP must go down.
When you increase wages at the lower ends of the economy or simply give these folks money, they will usually spend it quickly to meet their needs, which speeds up the velocity. They are able to take short term advantage of nominal rigidity only to have it come back and bite them in the ass later.

The same doesn't hold true at the upper income levels since most of the money gets reinvested and improves balance sheets - this tends to slow velocity. We're now coming out of a long slow velocity period where we've been increasing the money supply. There's really no good way to stop this now... Raising interest rates would reflect the true risk, but that may have a detrimental impact on GDP.

"When you increase wages at the lower ends of the economy or simply give these folks money, they will usually spend it quickly to meet their needs, which speeds up the velocity."

Yep. Which is why the Greenspan strategy, which has been in effect for decades has been to outsource labor and import goods from cheaper labor nations. This allowed them to increase the money supply while suppressing wages and keeping the domestic velocity of money and price inflation manageable. That pyramid scheme is coming to an end.

When the money helicopter hovers over Wall St, it can hold back the monetary inflation like a dam for the wealthy. The rich get richer, the poor get poorer. When the money helicopters fly out over the entire population, there is no dam, and the velocity of money spreads like a flood. Then the poor end up suffering even more.

 

[GlennwaldSnowdenAssanged]

Wages go up. Prices skyrocket. Government collects more sales taxes from inflated costs of goods and more property taxes. People come out going bankrupt.

 

[acptulsa]

Wages go up.

Propagandist.

Gee, my wage went from seven dollars to forty cents to a hundred seventy peanuts. I'm rich!

Van der Rohe said, "Less is more." Inflation says, "'More' is now less."

 

[oyarde]

Things to remember . Cost of production has gone up double digits in China the past two months and nearing it here. That is not yet reflected in the inflation but will show up soon . GDP from 2006 to 2018 averaged an increase of 1.9 percent per yr . Wages will never go up to keep pace with the new inflation thus the poor will become more poor daily. In the past 13 years the debt has tripled .There is no stopping this now until the next crash.

 

[Brian4Liberty]

Things to remember . Cost of production has gone up double digits in China the past two months and nearing it here. That is not yet reflected in the inflation but will show up soon . GDP from 2006 to 2018 averaged an increase of 1.9 percent per yr . Wages will never go up to keep pace with the new inflation thus the poor will become more poor daily. In the past 13 years the debt has tripled .There is no stopping this now until the next crash.

Yep. It is coming to an end...

...
Yep. Which is why the Greenspan strategy, which has been in effect for decades has been to outsource labor and import goods from cheaper labor nations. This allowed them to increase the money supply while suppressing wages and keeping the domestic velocity of money and price inflation manageable. That pyramid scheme is coming to an end.
...

 

[69360]

We were discussing it today. Decided to move from holding cash to hard assetts. This inflation is getting out of control fast enough to scare me. I just don't see prices coming back down again and don't want to lose my purchasing power. Probably a classic car and some more real estate. Am I wrong?

 

[Brian4Liberty]

We were discussing it today. Decided to move from holding cash to hard assetts. This inflation is getting out of control fast enough to scare me. I just don't see prices coming back down again and don't want to lose my purchasing power. Probably a classic car and some more real estate. Am I wrong?

Seems like a good idea. Of course that is exactly what leads to hyperinflation. Cash becomes a hot potato that no one wants to hold.

 

[69360]

Seems like a good idea. Of course that is exactly what leads to hyperinflation. Cash becomes a hot potato that no one wants to hold.

Yeah, I don't care about that anymore. Only looking out for myself now. This country is fucked anyway.

 

[Occam's Banana]

 

[osan]

One complaint: the use of "monetary" and "money", rather than "currency". The dollar is not money.

 

[acptulsa]

Probably a classic car...

Antiques are taking a hit, as are many luxuries the middle class used to be able to afford. A classic car may be useful, if it's well restored, for its simplicity and its inability to connect to the spyware that surrounds us. But it may take time for its value to outrun inflation. It may even depreciate for a time.

I'd avoid segments already overpriced and/or particularly impractical, like muscle cars.

 

[69360]

Antiques are taking a hit, as are many luxuries the middle class used to be able to afford. A classic car may be useful, if it's well restored, for its simplicity and its inability to connect to the spyware that surrounds us. But it may take time for its value to outrun inflation. It may even depreciate for a time.

I'd avoid segments already overpriced and/or particularly impractical, like muscle cars.

The rich are getting richer and the poor poorer. Poor people can't afford them. The rich can. So it works for me I believe if I had to sell.

I think I'm going to end up staying in Florida long term because it's marginally better than up north has become lately. So down here I can use it as an everyday car for both the simplicity and as a non-depreciating assett. I think it makes sense.

I'm legitmatley scared cash is losing purchasing power too quickly.

 

[Occam's Banana]

 

[Madison320]

Good article but it doesn't mention the time delay between inflation of the money supply and price inflation.

I wish I could find something easy to cite, since the internet is full of people who keep calling this "Biden's Inflation" as if it's not the direct result of relief bills signed by Trump over a year ago.

It goes back farther than that. The price inflation we're seeing now is also a result of the monetary inflation that started in 2009.

And I think the only important definition of monetary inflation is the Fed's balance sheet, in other words the total amount of money printed. Forget about M1,M2,M3. Those are all just derivatives of the fed's balance sheet. The ultimate driver, in the long run, is the fed's balance sheet.

 

[TheTexan]

We were discussing it today. Decided to move from holding cash to hard assetts. This inflation is getting out of control fast enough to scare me. I just don't see prices coming back down again and don't want to lose my purchasing power. Probably a classic car and some more real estate. Am I wrong?

5.56 will retain its value

 

[acptulsa]

It goes back farther than that. The price inflation we're seeing now is also a result of the monetary inflation that started in 2009.

And I think the only important definition of monetary inflation is the Fed's balance sheet, in other words the total amount of money printed. Forget about M1,M2,M3. Those are all just derivatives of the fed's balance sheet. The ultimate driver, in the long run, is the fed's balance sheet.

Yes, it goes back to Dubya. Or Nixon, and Bretton Woods. But it hit Warp Speed under Trump.

Interesting how the names of Republicans keep coming up, isn't it?