Understanding the definition of inflation can be confusing at best for the novice. Look at any dictionary and depending upon the time it was issued you will have a variety of definitions.
Webster’s Classification
The definition of inflation given in the 1983 version of Webster’s dictionary leads us to believe that inflation is caused by a rise in the money supply and this in turn results in prices increasing. More currency is being circulated and the failure to meet supply and demand is in effect. So it was termed that inflation wasn’t an effect rather the cause.
If we look at the definition that Webster’s gives in 2000 is says that a continual increase in the prices at the consumer level or a deterioration in currency’s purchase power caused by a rise in money that is available, along with credit that goes beyond the percentage of services and goods that are available. This definition leads us to believe that inflation is the result of the rise in prices rather then it being the cause.
In simpler terms, the definition from 1983 compared to the definition of 200 shows a shift from inflation being the cause to the end result. This leads the consumer to understand that inflation is when they go to the store and see that price of goods and services have gone up.
What is Monetary Inflation?
What monetary inflation basically is when the government prints more money to increase the supply. Though increasing the supply of currency that is in circulation would seem to be a good thing, when there is nothing behind it, this is what causes inflation.
The Federal Reserve keeps track and prints the supply of money that is measured in three ways. They are M1, M2 and M3. M1 is the most liquid of the three. M3 includes the huge deposits that are held by banks in other countries. M2 lies somewhere in the middle and is basically the cash in your pocket along with your savings and checking accounts.
In simpler words the more the government increases the currency supply quicker than the amount of goods increases, then we have inflation. Most people are under the false impression that the reason behind rising prices is that businesses get greedy. In a system based on free enterprise such is not the case. Businesses that succeed above the competition are the ones that are providing us with the highest quality of goods at the lowest price. So if a business raises their prices anytime they want, before long their customer base will be buying said goods somewhere else.
Why businesses increase their prices is because the currency supply has increased and they must raise the price in order to get the same value they had in the past for their goods and services.
The financial world can paint a stormy picture for those that are not in the know. The average consumer doesn’t take into account the reasoning behind such rises in prices; they only know that it affects their cost of living in a way that is detrimental to their lifestyle.