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Truth and conse-quences about inflation by Michael J. Hicks, PhD

Almost nothing in economics seems to confuse people as much as monetary inflation. That confusion leaves an intellectual void into which some of the least credible ideas of the modern world crawl.

Goods and services typically have a price dictated in currency, like our dollar. The prices for these goods can rise or fall for a variety of reasons. Sweet corn is cheaper at the end of July than the end of June because it is more plentiful in July, and its price will rise again in late summer. This is simple supply and demand, not inflation.

We hear often about healthcare costs rising, but are they really? There is almost no medical procedure that is more costly now than it was a couple decades ago. Healthcare costs and prices are falling, but we consumers are buying more of it because we are offered a dizzying array of medical services with which to make our lives better. This is also simply supply and demand, not inflation.

A beer example is perhaps the best way to describe healthcare. If I buy a six-pack of beer today and like it so much I go back to the store and buy two six-packs of a better, more expensive beer tomorrow, that ain't inflation, simply higher demand.

As it turns out, inflation can only occur when the supply of the money used to make the transaction increases. Inflation is not due to some underlying change in the supply and demand for goods or services, but in an excess supply of the currency in which we measure the price of goods.

This growth in the money supply is only a necessary, but not sufficient, condition for inflation to occur. We also need businesses that aren't afraid to raise prices and workers who are unafraid to ask for higher wages.

In the wake of the Great Recession, we have had a historic growth in the supply of money, but few businesses seem willing to boost prices and few workers feel inclined to demand higher wages. So, we have had very modest inflation for several years.

This unwillingness to change prices has come as a bit of a surprise to many economists, including this one. I even wrote a doctoral dissertation on price stickiness, as this phenomenon is called. The current low rate of inflation is not due to the government “cooking the books.” Now, I know some readers think there is a grand conspiracy at foot to lie about official statistics. That is nonsense of the first order.

It is true that future inflation can be very damaging and looms deeply over our future. This is especially true because the Federal Reserve has no historical example of a nation safely reducing the huge money supply we now have. Still, the very low inflation now is a sign of continued weakness in an economy that remains unable to grow and create jobs and opportunity. Why would the Obama Administration lie about that? Moreover, does any rational reader believe this administration is sufficiently competent to hide such a large scale lie? Nope!

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Francis Ball distinguished professor of economics in the Miller College of Business at Ball State University.