Henry Hazlitt once said, “Inflation, always and everywhere, is primarily caused by an increase in the supply of money and credit.” In fact, inflation is the increase in the supply of money and credit.
At least that was the original definition. But inflation has been redefined as an increase in the general price levels of goods and services. However, using inflation to mean a rise in prices, Hazlitt argued, “is to deflect attention away from the real cause of inflation and the real cure for it.” …
When the state expands the credit and money supply, it redistributes purchasing power and causes the misallocation of resources in the market. In that redistribution, there are necessarily winners who are able to purchase more and losers who are able to purchase less. This is called the Cantillon effect, named after Richard Cantillon (1680-1734) who first observed that money creation has uneven effects in the market.
When the state prints and spends money or makes money available to lenders, the government and the early recipients of the new money benefit. But that gain necessarily comes at the expense of others, because the new money has not produced any additional real wealth.
[We use the more modern and retail definition of inflation in order to report on its impact for consumers. That’s a legitimate measure, and it matters. Axel Weber is also correct to focus on the more technically precise definition of inflation as a way to comprehend the forces it unleashes. Perhaps we could talk more accurately about “price inflation” as a way to distinguish between the two. However, both matter, and we need to discuss both to prevent the diversion Weber describes here. — Ed]
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