The Truth About Inflation: Is It Normal in Any Economy?

In economics, inflation is often misunderstood. Many believe that it is an inevitable part of a healthy economy, yet this perception can be misleading. In this article, we will delve into the true nature of inflation and explore its effects on economic stability and growth.

Understanding Inflation as a Product of Money Supply

In its essence, inflation is the increase in the money supply. It is important to differentiate it from an increase in the supply of goods, as prices of goods reflect changes in the supply of money. Optimal economic conditions would dictate a fixed, stable money supply. However, it is not in the best interest of those who control the money supply for it to remain constant.

Motives of Money-Printers

For those with control over the printing press, an ever-increasing supply of money is more beneficial. The moral dilemma of not printing money when one has the ability to do so is simply a matter of how much one believes they can get away with. Historically, a target of about 2% per year has been deemed acceptable, allowing them to print money without immediate backlash from the general public, despite the eventual economic distortions this generates. This perception is deeply entrenched in central banking rhetoric and policy-making.

Deflation and Economic Growth

During periods of healthy economic growth, the supply of goods and services increases more than the money supply. Consequently, this leads to a gentle deflation, which is beneficial as it allows our purchasing power to grow over time. This is an ideal situation where goods and services can be acquired more easily with the same amount of money, enhancing overall economic welfare. However, central banks often view deflation as undesirable, leading to their efforts to counter it through inflation.

The Stealth Tax of Inflation

The policy of promoting inflation, often cited as a necessity for economic growth, in reality erodes the purchasing power of the general public. If goods and services are expanding at about 3% per year, the central bank can print an extra 3% without causing an immediate rise in prices, providing some semblance of price stability. However, this comes at a cost: 3% of the value of goods and services that are stolen from us through the devaluation of the currency. When you see an inflation rate of 2%, you might not realize that you are experiencing a stealth tax, with a combined inflationary rate of about 5%—3% declining value plus 2% inflation.

Conclusion: End the Fed?

The current monetary policy framework, with its focus on maintaining an inflation rate, undermines long-term economic stability. Central banks claim that a certain level of inflation is necessary for economic health, but the underlying rationale is often more about political and economic power than genuine economic interests. By promoting inflation, they are essentially taxing the general public at an undetectable rate, which is not a sound economic practice.

Thus, the question of whether inflation is 'normal' in any economy is one that requires critical analysis. While central banks continue to print money, claiming it necessary for economic growth, it is essential to question the motives and the true cost of this policy. The alternative of a stable, deflationary environment may offer a much more viable path to true economic prosperity.