Nonsense

First we should make sure what we are talking about. The right think that when the workers get a pay rise it is inflation. It is not. The left think that when the corporate sector increase the price of a good or service it is inflation. It is not. It is also not inflation when the exchange rate falls pushing the price of imports up a step. It is also not inflation when the government increases a particular tax (say the GST) by x per cent to some new level.

So while a price rise is an essential pre-condition – a necessary condition – for what we call inflation it is not a sufficient condition. That is, the observation of a price rise will be required to define an episode as being inflationary (at some point) but observing a price rise alone will not be sufficient to categorise the phenomena that you are observing as being an inflationary episode.

Inflation is the continous rise in the price level. That is, the price level has to be rising each period that you observe it. So if the price level or a wage level rises by 10 per cent every month, then you have an inflationary episode. In this case, the inflation rate would be considered stable – a constant rise per period. If the price level was rising by 10 per cent in month one, then 11 per cent in month two, then 12 per cent in month three and so on, then you have accelerating inflation. Alternatively, if the price level was rising by 10 per cent in month one, 9 per cent in month two etc then you have falling or decelerating inflation.

Tripe in fact. Inflation (of deflation) is a rise (or fall) in the general price level, not a change in the price of one or other component of it. Wages have (more accurately, total compensation and real total compensation too) risen for a couple of centuries in line with productivity rises. We do not call this inflation. Thus it is not price rises over time periods which we define as inflation.

Leaving us with what we do so define and that’s a rise in the general price level, rather than some or other component part of it.

18 thoughts on “Nonsense”

  1. I don’t read that the same way you do.

    Inflation is the continous rise in the price level

    Seems similar to your:

    Inflation (of deflation) is a rise (or fall) in the general price level>/blockquote >

    But I’m in bed with the flu so I could be missing something important (eg “continuous “?)

  2. The distinction is that he’s saying that it must happen time period after time period for it to be inflation. I am saying that it does not need to be. I am saying that it needs to be the general price level, he is saying any price, time period after time period. My proof is that real wages have been rising for two centuries. That’s time period after time period. But we don’t call that inflation.

  3. ” real wages have been rising for two centuries”
    Roughly corresponds to the introduction of income tax, doesn’t it?
    Just saying….

  4. Isn’t the Austrian view that inflation/deflation is a change in the money supply, so price changes result. The price changes and their direction are affected by any change in productivity so if productivity is rising faster than money supply then price levels could fall.

    I argue that people saying inflation to mean a change in purchasing power for my pound is in error. Of course individual items changing in price will also include any changes in supply and demand.

    For simplicity ignore multiple currencies. The main point stands but the explanation is longer.

    Focusing on money supply as inflation correctly points the finger at the gov/central bank, who should be held accountable not factor input prices.

    For simplicity the above ignores bringing black economy and those other things not previously measured in to the GDP figures.

    IanB said once I think that an increase in GDP is caused by inflating the money supply (assuming velocity of money is held constant). Sounds about right to me.

  5. Roughly corresponds to the introduction of income tax, doesn’t it?

    I suspect these are both effects of the increase in productivity due to the industrial revolution.

  6. Isn’t inflation a symptom of a decrease in trust of the currency, (or perhaps the general economy)?

    And when that trust collapses, you get hyperinflation.

  7. bIs, post hoc ergo propter hoc.

    You have your causality reversed. You can’t tax wealth till it’s created. Income tax was to fund the Napolionic wars.

  8. Using inflation as a synonym for changes in the general price level makes the same mistake as using male and female to define gender as well as biological sex. While these terms are initially useful in general discussions you ultimately end up with a debasement of both the currency and our language as evidenced by Bruce Jenner in a dress.

  9. I Sneeze In Threes-

    Yes.

    Tim W here seems to be to be confusing wages (the price level of labour) with real wages, the purchasing power of wages. Wages rising is (a symptom of) inflation. In a non-inflationary economy in which productivity is increasing, the same wage will over time buy more goods and services.

    If 100 years ago a job paid £5 per week, and now it pays £500 per week, that’s inflation. If it still pays £5 per week, but now your £5 will afford you a comfortable lifestyle whereas 100 years ago it was poverty level, that isn’t inflation, it’s the benefit of productivity increases. Current policy is to try to inflate the money supply such that the price level tracks productivity increases, so that they cancel out. But it’s still inflation. So this-

    Wages have (more accurately, total compensation and real total compensation too) risen for a couple of centuries in line with productivity rises. We do not call this inflation.

    Is wrong. We do call that inflation. It’s precisely the same definition of inflation that the BoE use when they are trying to ensure that inflation is a steady 2%.

  10. hmm… wasn’t inflation one of those things with a very open-minded input , an accurrate output, but a very marked dependency on the validity of the output depending on you initial assumptions and definitions?

    Like any flexible tool… it only gives accurate answers within the framework of the input. Its validity for anything outside that framework may vary.

  11. So keep it away from politicians, journalists, members of the general public, unions and quangos.

  12. I recall a TV reporter lady standing in front of a petrol forecourt talking about a jump in oil prices and how it will push up the price of petrol which in turn will push up the price of many other things. She thought this was inflation. Her considered opinion was that the government would be looking to increase interest rates in response.

    These days I just watch Netflix.

  13. “Always and everywhere, inflation is a monetary phenomena”

    thus spake Milton Friedman.

    I’m not sure that he wasn’t a bit tongue in cheek but in order to emphasise a point that needed hammering home.

    Inflation is whatever you define it to be, though there does need to be an increase in nominal price.

    I kinda like Friedman’s quip, but really, inflation is a rise in nominal price, no more, no less, whatever the cause and whatever is happening to real spending power.

    It is typically driven by more money chasing what can be bought, but if its a genuine rise in factor costs, or rents, then its still inflation – to define inflation othewise would be perverse.

    So Milton’s famous phrase is best for beating up on lefties rather than defining inflation.

  14. ” inflation is a rise in nominal price, no more, no less, whatever the cause and whatever is happening to real spending power.”

    But it isn’t.

    Inflation, being a monetary phenomenon, can be addressed with interest rates. By contrast, if and when the price of oil rebounds sharply and even over-shoots previous highs it will lead to a significant general increase in prices; yet it would be ludicrous to increase interest rates as a response. Even though the symptoms are similar, one is inflation and the other is simply things costing more.

    Since it is essential to be able to distinguish between the two type of price change it is obviously necessary for us to have a word for naming the purely monetary phenomenon; that word being “inflation.”

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