Should Inflation Be Defined Only as Price Increases?

 If inflation is simply described as a general rise in prices, why is it seen as negative? It is believed that inflation leads to speculative buying, wasting resources, and harming the incomes of low-income individuals, which ultimately hinders economic growth. Questions arise about why a general price increase would negatively impact some groups and not others, and how it causes resource misallocation.

Historically, inflation occurred when rulers forced citizens to surrender their gold coins, replacing them with lighter coins so the ruler could use the excess for personal expenses. This led to more money than goods, driving up prices. The essence of inflation, therefore, is not just rising prices, but the artificial increase in the money supply. In modern terms, inflation refers to the growth of non-gold money like paper currency and digital transactions, leading to higher costs for goods and services.

This understanding implies that inflation should be identified as the increase in the money supply rather than just price changes. An increase in money supply causes misallocation of resources that hurt wealth production. Mises noted that many confuse inflation with the resultant price increases. More confusion exists today as the term “inflation” has lost its original meaning, leading to misunderstandings.

When money is created, there are early and late recipients of that money. The first recipients benefit the most as prices haven't yet risen, while later recipients face the brunt of price increases, often including low-income individuals who end up suffering the most from monetary inflation. Observations of price changes often fail to consider the crucial role of money supply and monetary policies.

Economists like Milton Friedman argue that expected inflation, when anticipated, is less damaging compared to unexpected inflation. According to him, if producers and consumers expect price increases, they can adjust their actions accordingly, minimizing damage. For Friedman, controlling the growth rate of money supply should stabilize prices and foster economic growth. However, he overlooks that even a predictable money supply expansion continues to transfer resources from wealth creators to non-producers.

The concept of an average price level, such as the Consumer Price Index (CPI), is also debatable. It assumes the ability to average different goods' prices, which is fundamentally flawed. For example, averaging prices between different products is conceptually meaningless as different goods possess unique values.

Even with an artificial increase in money supply and growth in real economic production, prices might not rise. Relying solely on price levels could mislead economists, as shown before the Great Depression, where the stability of prices masked inflationary conditions. Consequently, understanding inflation as artificial money supply growth is crucial.

In summary, regardless of how inflation is displayed through price hikes or economic cycles, the focus should be on the artificial increase in money supply. This understanding counters solutions targeting only symptoms of inflation, which could worsen underlying problems. 

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