Many economists continue to demonstrate their confusion about the subject of inflation. While ordinary people clearly feel the effects of monetary inflation in the form of higher prices for most goods and services, elite pundits labour under a misapprehension of the law of cause and effect.

Most recently, economists are surprised by the fact that Canada’s rate of inflation for March 2011 was higher than expected. Of course, they are referring to the effects of monetary inflation: higher prices. Once again, they confuse and obscure cause and effect relationships. The Bank of Canada has now raised its inflation rate forecasts, but it is blaming rising energy prices as though rising prices caused inflation.

Less than 2 years ago, in August 2009, these economists were pontificating about inflation rates having reached a 56-year low in Canada. My essay posted at the time was highly critical of the inflationary policy of government and the confusion over cause and effect among central bank leadership and professional economists. Time has not enlightened them.

Confusing Prices with Monetary Inflation

Economists study “inflation” and comment on the phenomenon in the media; they also speak of “core inflation” rates, which in their calculations exclude the supposedly volatile energy and food prices. It was the increase in the core inflation rate that shocked financial industry economists and Bank of Canada officials.

Prices fluctuate in markets for many reasons, but basically it is an issue of relative supply and demand. Millions of individual decisions by market participants are communicated in the form of prices. In that sense, the price of some good always represents historical information, though it may include someone’s speculation about future prices. Prices of goods freely determined in open markets are among the most efficient sources of information in society.

Consumers Recognize Price Changes; Causes May Be Obscured

When relative prices go up significantly, as in recent energy and food price spurts, consumers of these products may reallocate budget expenditures to realign them in accord with their unique preferences.

Everyone is pretty much aware that the prices of food, gasoline and many other products have been rising for some time. Once the concept of monetary inflation is better understood by more citizens it may become more difficult for the elite to confuse themselves and bamboozle the rest of the country with their arcane—and incorrect—explanations of inflation. It’s simple: an increased supply of money and credit—especially in the form of fiat currency and artificially low-interest rates—leads ultimately to higher prices for everything.

Honest Money

Money is an economic good as well as a medium of exchange. Every transaction outside of simple barter involves money. Money therefore must be subject to the laws of the free market to be of objective value to traders. It earns the term “honest money” under these conditions. The easiest way to destroy an economy and simultaneously disrupt civil society is to debase the money.

The ideal money should not be something that can be easily created by anyone, including government. Money that was developed over centuries by traders had to be something durable, portable and relatively scarcer than other goods. By fulfilling those attributes the money adopted by traders was trusted, giving confidence to others that they could have a means to store profits for future requirements. If people come to distrust the money being used, it quickly becomes worthless.

Governments’ way of addressing this problem of acceptance was to decree that paper currency is legal tender. That is what fiat currency is—money you are forced to use by government. In short, it’s a fraud.

Conclusion

Everyone should try to understand the role of money in a free economy. Informed citizens can then easily see how fiat money ultimately threatens economic livelihood and political freedom by becoming worthless over time due to inflationary monetary policies.

©Copyright 2011 Edward Podritske