Ludwig von Mises Institute

Price inflation

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Price Inflation is an increase in the price of a standardized good/service or a basket of goods/services over a specific period of time (usually one year). Because the nominal amount of money available in an economy tends to grow larger every year relative to the supply of goods available for purchase, this overall demand pull tends to cause some degree of price inflation.[1]

Price inflation versus inflation[edit]

In a popular definition, an ongoing rise in the general level of prices is called inflation.[2]

However, this fails to explain why inflation is dangerous or exactly how does it cause its effects. "Why should a general rise in prices weaken real economic growth? Or how does inflation lead to the misallocation of resources? Moreover, if inflation is just a rise in prices, surely it is possible to offset its effects by adjusting everybody's incomes in the economy in accordance with this general price increase."[3]

It is sometimes claimed, that a specific price increase - e.g. of oil - can increase all prices on average. But if people must spend more on oil, will not prices drop for the goods that they can no longer afford to purchase?[4] (It is also impossible to establish an average of prices of different goods and services.[3])

It is contended that the increase in commodity prices often occurs before the increase in the money supply. Immediately after the outbreak of war in Korea, strategic raw materials began to go up in price on the fear that they were going to be scarce. Speculators and manufacturers began to buy them to hold for profit or protective inventories. But to do this they had to borrow more money from the banks. The rise in prices was accompanied by an equally marked rise in bank loans and deposits. If these increased loans had not been made, and new money had not been issued against the loans, the rise in prices could not have been sustained. The price rise was made possible, in short, only by an increased supply of money.[5]

References[edit]

  1. ↑ Investopedia. "Price Inflation", referenced 2012-01-20.
  2. ↑ Lawrence H. White. "Inflation", The Concise Encyclopedia of Economics, referenced 2009-05-26.
  3. ↑ 3.0 3.1 Frank Shostak. "Defining Inflation", Mises Institute, posted on 2002-06-03, referenced 2009-05-26.
  4. ↑ Christopher P. Casey. "Only Criminals Use Honest Money", Mises Institute, posted on 2009-06-03, referenced 2009-06-3.
  5. ↑ Henry Hazlitt. "What You Should Know About Inflation", Mises Institute, referenced 2009-06-07.

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