Concerning Interest In Redefining “Inflation”

By Connor O’Keeffe, Mises Institute

As Kevin Warsh takes over as chair of the Federal Reserve, investors and financial media outlets are looking closely for any hints at how his appointment will impact monetary policy.

One series of comments Warsh made while testifying to Congress back in April as a nominee has been getting more attention in recent weeks, following some high inflation reports. Essentially, Warsh signaled that he believed in focusing primarily on inflation data from core or even trimmed price indexes.

To understand what that means or why it matters, it’s important to note that, originally, “inflation” was a term that simply meant the act of increasing, or inflating, the money supply. Once paper money—or, more accurately, paper claims to physical commodity money like gold—became widely adopted, it didn’t take long for governments, bankers, and counterfeiters to realize that they could easily enrich themselves by creating and spending brand new paper claims to money. It also didn’t take long for it to become obvious that printing a lot of new currency artificially raised the supply, making each unit of currency worth less than it had before—a phenomenon that most people experienced as a general rise in prices.

That artificial decline in the value, or purchasing power, of the currency was obviously not appreciated by the general public. It was a literal wealth transfer that benefited the small sliver of society who got the new money early at the expense of everyone else. So, over time, monetary authorities and their intellectual allies worked to obfuscate the concept.

To “respectable” economists and citizens, inflation was no longer the act of printing money, which caused a general rise in prices. Inflation was a general rise in prices, the cause of which was now, frequently, to be considered a total mystery or, at least, an extremely complex convergence of factors that could never be blamed on a single group.

Today, some economists use the term “monetary inflation” to refer to the old definition. But when inflation is brought up in public discourse, it’s virtually always in reference to price inflation—the general rise in prices.

It’s also worth noting that a general rise in prices is actually impossible without a change in the money supply. Even if a historic supply shock like the covid lockdowns or the closure of the Strait of Hormuz occurs, as long as the money supply remains unchanged, the sharp increase in some prices would cause a fall in prices elsewhere. People would be forced to cut back on less essential things, and demand would fall for so-called complementary goods. That drop in demand would drive some prices down. The only way to raise prices across the entire economy is to manipulate the monetary unit.

So even if we want to focus on...(READ THIS FULL ARTICLE 100% FREE HERE).