Defining “Inflation” Correctly

by Frank Shostak

Inflation is typically defined as a general increase in the prices of goods and services—described by changes in the Consumer Price Index (CPI) or other price indexes.

If inflation is a general rise in measured prices, then why is it regarded as bad news? What kind of damage can it inflict? Mainstream economists maintain that inflation causes speculative buying, which generates waste. Inflation, it is maintained, also erodes the real incomes of pensioners and low-income earners and causes a misallocation of resources.

Despite all of these assertions regarding inflation’s side effects, mainstream economics doesn’t tell us how all of these bad effects are caused. Why should a general rise in prices hurt some groups of people and not others? Why should a general rise in prices weaken real economic growth? How does inflation lead to the misallocation of resources? Moreover, if inflation is just a rise in prices, surely these effects can be offset by adjusting everyone’s incomes in accordance with this general price increase.

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