Do Price Increases or Money Supply Increases Misallocate Resources?
Most economists and economic commentators believe that inflation is defined as general increases in prices of goods and services. Thus, they hold that anything that contributes to price increases sets inflation into motion.
A decline in unemployment or an increase in economic activity are seen as potential inflationary triggers, while other factors, such as increases in commodity prices or workers’ wages, are also regarded as inflation triggers. Many experts also believe that inflation causes speculative buying, generating waste. By popular thinking, inflation also erodes the real incomes of pensioners and low-income earners and causes a misallocation of resources. Inflation, it is argued, also undermines real economic growth.
Why should a general rise in prices hurt some groups of people and not others? Or how does inflation lead to the misallocation of resources? Why should a general rise in prices weaken real economic growth? For one, a price of a good is the amount of money paid for the good, and this suggests that for a given amount of goods, a general increase in prices can take place in response to the increase or inflation in money supply.
Most economists, when discussing the issue of general increases in prices, which they label inflation, rarely mention the word money. The reason is the lack of an accurate statistical correlation between changes in money and changes in various price indexes such as the Consumer Price Index (CPI). A statistical correlation, or lack of it, between two variables shouldn’t be the determining factor in establishing causality. Instead, one must figure out the structure of causality by means of reason and logic.
The Essence of Inflation
Inflation is an act of embezzlement by means of increasing the money supply. According to Ludwig von Mises:
To avoid being blamed for the nefarious consequences of inflation, the government and its henchmen resort to a semantic trick. They try to change the meaning of the terms. They call “inflation” the inevitable consequence of inflation, namely, the rise in prices. They are anxious to relegate into oblivion the fact that this rise is produced by an increase in the amount of money and money substitutes. They never mention this increase
Article from Mises Wire