Written by Gareth Seward
Here’s a curious thought for you to ponder if you have any cash savings or a pension plan. At the current rate of CPI measured inflation in the United Kingdom as of May 2022, every pound you have will only be worth forty-two pence in ten years’ time. That’s fifty-eight per cent of its value that the government will have stolen from you via the inflationary stealth tax, and that’s before all the other direct taxes the government hits you for on top of that (Income Tax, National Insurance, VAT, Council Tax, excise taxes and so on).
What makes this notion even more galling is firstly the present inflationary trajectory will almost certainly rise even higher than the current nine per cent, and secondly the Consumer Price Index (CPI) is a bogus metric used for gauging inflation to make the “official” figure sound a lot more politically friendly than what the real rate actually is. The majority of the money and credit that gets created via the various inflationary methods (open market operations – the selling of government gilts, fractional reserve banking and quantitative easing) enters the economy through government spending, financial markets and property markets, none of which is accounted for by the CPI. In fact, the core CPI doesn’t even account for food or energy prices, and it is often this core indices that gets used in reports to make that rate appear a little more PR friendly.
Inflation is an insidious stealth tax used by the state to transfer wealth. It steals from the regular citizen and rewards the politically connected. It makes the rich get richer and the poor get poorer. It widens the wealth gap and increases inequality; the Cantillon Effect. It is no wonder then, in an attempt to muddy the waters and cause confusion to those who may have a slight arousal of curiosity as to why they seem to be getting poorer, that in recent years the “establishment” (state bureaucrats, economists, politicians, media) have tried to redefine the actual definition of inflation to deflect any attention away from the state’s underhanded chicanery. It now seems the popular mainstream definition of inflation has changed to simply being “when prices rise”. This is incorrect, in spite of what your modern dictionaries might say.
The definition of inflation is not when prices increase, and neither are price increases the cause of inflation. Simply, price increases are an effect of inflation, more a symptom if you will. Inflation is actually an increase to the economy’s overall money supply, via bank credit expansion or direct money printing, without a corresponding increase in a demand for money.
What is meant by the demand for money? It basically means how much asset in the form of money people wish to hold, often referred to by economists as “liquidity preference”. There are several factors that can influence this demand, including income and interest rates. Also, one half of almost every transaction involves an exchange for money, and the majority of the other half of such transactions are usually goods and resources. And there’s the issue; increasing the money supply doesn’t magically increase the amount of goods and resources available or in existence. So, what you then have is more money available chasing relatively fewer goods and resources.
When Carl Menger published his seminal work Principles of Economics in 1871, he established a fundamental economic approach based on the subjective theory of value. He explained that the variance in the value of goods and services is determined by what we call marginal utility, basically meaning how much satisfaction or pleasure is gained from consumption compared to other alternative goods and services. An element of this theory is what we call diminishing marginal utility, which basically shows what you probably already know – the more that something is abundant and readily available, the less it is worth. Value is increased by scarcity not abundance.
This basic economic law also applies to money. An increased amount of something diminishes how much it is valued, and in the case of money such diminishing value means a reduction in its purchasing power. What is key to understand here that the only reason prices appear to be increasing (if we are to say the price increase is due to inflation, and not other factors such as supply shocks etc.) is literally because the value of the currency has been made weaker, so it takes more of it to achieve the purchasing power needed to buy things.
So that is the original and true definition of inflation. We can determine this definition to be true if we imagine a fixed money supply. If the money supply remained a fixed constant, then whenever the demand for certain goods and services increased, more money would be allocated towards these goods – resulting in their prices rising. This would obviously mean less money could be allocated towards other goods, meaning demand for them would drop and as such their prices would drop too. So, if some prices rise, others will have to fall if there was a fixed supply of money.
If on the other hand the demand for money itself increases, effectively meaning people prefer to save money rather than spend on goods and services, then prices would generally fall – because clearly less money would be allocated on goods, lowering the demand for them. For prices to generally rise then, there would need to be an increase in the supply of money. So, if there was no change in the demand for money but there became more money available via an increased supply of it, a greater amount of money can be allocated towards all goods and services. From this we can obviously see that inflation is an increase in the money supply that in turn causes prices to rise, rather than the revised and incorrect definition that rising prices themselves are inflation.