Inflation, High Inflation, Hyperinflation, by Thorsten Polleit

A government will debase its fiat currency to its intrinsic value: zero. Whether that’s a product of inflation, high inflation, or hyperinflation is a function of how fast the government debases. From Thorsten Polleit at mises.org:

The word “inflation” is heard and read everywhere these days.

However, since different people sometimes have very different understandings of inflation, here is a definition:

Inflation is the sustained rise in the prices of goods across the board.

This definition conveys that inflation means that the increase in prices of goods is not just a one-off but permanently; and that not just some goods prices go up, but all.

How does inflation arise? The economists have two explanations ready. The first explanation is the “nonmonetary” explanation of inflation. According to this theory, sharply rising energy prices lead to inflation. This is referred to as cost-push inflation.

Or inflation is caused by excess demand: the demand for goods exceeds the supply, causing prices to rise.

The second explanation for inflation is monetary. “Inflation is always and everywhere a monetary phenomenon,” as US economist Milton Friedman put it.

And that’s right. Because in an economy without money, there is simply no inflation. So, you can see: Inflation has something to do with money.

It can be demonstrated theoretically that an increase in the money supply leads to an increase in goods prices—the prices of goods will be higher compared to a situation where the money supply has not been expanded.

There is quite some empirical evidence that increasing the amount of money over time is associated with rising goods prices—be it in the form of consumer goods prices and/or asset prices such as stocks and real estate.

With a view to current developments in the world, however, both explanations can be meaningfully connected.

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