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Tuesday, 4 January 2011

Inflation

Inflation is always and everywhere a monetary phenomenon: Milton Friedman.

Inflation is a sustained rise in the general price level of goods and services inside a national economy or monetary union (e.g. the European Monetary Union) over a period of time. Prices are normally expressed in terms of unstable money (the unstable functional currency) which results in the unit of measure or unit of account being an unstable measuring unit in an economy or monetary union. Inflation always and everywhere erodes the real value of the depreciating functional currency (money) and other depreciating monetary items over time. Inflation has no effect on the real value of non-monetary items. Disinflation is a decrease in the rate of increase of the general price level; i.e. disinflation is lower inflation. Inflation still erodes the real value of depreciating money and other depreciating monetary items during disinflation - just at a slower rate than before.

Deflation is a sustained absolute decrease in the general price level. Deflation creates real value in appreciating money and other appreciating monetary items over time, recently mainly seen in the Japanese economy.

Inflation reared its ugly head soon after the invention of unstable money. It only eroded the real value of depreciating money and other depreciating monetary items at that time as it does today. Inflation did not and can not erode the real value of non-monetary items – either variable or constant real value non-monetary items.

Nicolaas Smith

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Fin24 18-3-11