Tuesday, 26 September 2006

More myths about inflation

If oil prices keep falling, that'll be good for inflation, right? Well, not exactly. Frank Shostak points out here that it is not increases and decreases in oil prices that drive the inflation rate, it is actually increases and decreases in the money supply -- and we know who controls that. Check out his analysis here. As the Mises site summarises:
The idea that increases or decreases in oil prices are what drives the inflation rate ... is an ancient Keynesian-style myth, based on the idea that producers have exorbitant power to make consumers shell out no matter what the economic conditions. Of course the myth has a convenient advantage for [central banks], in that it completely removes the [central banks] from blame, which is why you often find [central bankers] promoting the myth--most recently [Alan Greenspan's successor] Ben Bernanke.
As Milton Friedman has always said, "Inflation is always and everywhere a monetary phenomenon." Think about that. And here's another related myth: the one that says "inflation is under control."

Is it? If inflation is "under control" how come some prices (energy, housing, medical care, education, interest rates) have been going through the roof, while some other prices (computers and computer accessories, wireless phones, watches, shoes and clothing) have been gently and benevolently been falling over recent years?

The answer of course, as Lew Rockwell explains here, is that the official inflation figure, the Consumer Price Index, is simply an artificial fiction designed to conceal these changes -- but is an artificial fiction on the basis of which our central bank is strangling the economy and exporters with higher interest and exchange rates than would otherwise be the case.

Can anyone tell me why we put up with it? Why are even mainstream economists these days happy to accept that the markets for shoes, clothing and computer can be managed by the market, but the market for money has to be managed by a government department, even when it's demonstrably destructive? And as a supplementary question, why is it that it is the freer markets are the ones in which prices have been gently and benevolently falling, while it is the more controlled markets in which prices are increasing?

Have a think about that.

LINKS: Will an oil price fall push inflation down? - Frank Shostak, Mises Institute
What government is doing to our money - Lew Rockwell, Mises Institute
Exporters pay price for inflation fighting - Not PC (Jan, 2006)
Consumer Price Index - Statistics Department
Price stability, inflation and deflation - Reserve Bank

RELATED: Economics


  1. you misquote Friedman--" Inflation is always and everywhere a monetary phenomenon" ....in the long run.

    there is a very key macro point in that, money is indeed the major and possibly only fluctuator.... in the long run.

  2. No, that's not a misquote.

    As Virginia Postrel summarises his position, "Against the conventional wisdom, Mr. Friedman argued that "inflation is always and everywhere a monetary phenomenon." Inflation had nothing to do with aggressive unions, greedy businesses or even oil cartels -- the bad guys who took the blame in the confusing 1970's. Prices shot up everywhere because the federal government made the supply of money grow faster than the real economy created value. Based on the historical record, he argued, the effects of monetary policy were fairly predictable."

    A releated "proposition [of Friedman's is] that monetary policy can affect real output only in the short run. The Phillips curve works only for a few months. Long-term economic growth depends on real factors like innovation, investment and entrepreneurship." [Emphasis mine.]

  3. Great chapter on inflation in Robert Ringer's libertarian classic "Restoring the American Dream".


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