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Wednesday, 15 February 2012

Inflation is generally paying more money for the same real value.

Inflation is generally paying more money for the same real value

Inflation is the erosion of the real value of monetary items over time.

Inflation only erodes the real value of monetary items not inflation-adjusted daily in terms of a Daily Consumer Price Index or monetized daily indexed unit of account, e.g. the Unidad de Fomento in Chile during low and high inflation or a daily foreign currency parallel rate (normally the US Dollar daily parallel rate) or a Brazilian-style Unidade Real de Valor daily index rate during hyperinflation.

The cost of inflation is the consequence of not inflation-adjusting a monetary item on a daily basis. There is no cost of inflation when a monetary item is inflation-adjusted on a daily basis. 20 to 25 per cent of the broad M3 money supply in Chile is inflation-adjusted on a daily basis in terms of the Unidad de Fomento according to the Central Bank of Chile. $ 2.89 trillion of government inflation-linked bonds are inflation-adjusted daily in terms of a Daily Consumer Price index worldwide.

Paying more money for more real value is a price increase. That is not inflation. That is simply a real value price increase. Generally paying more money for the same real value is inflation. That is an increase in the general price level.



Nicolaas Smith

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