No Econ. Concept More Thoroughly Misunderstood Than Inflation

There is no concept in economics today that is as poorly understood as inflation. Academic economists, investment professionals, media pundits, and politicians all wallow in confusion about what it is, what causes it, and what impact it has on the economy.  Unfortunately, this confusion frequently results in poor policy prescriptions used in an attempt to fight it.

Inflation is a decline in the value of the currency. That’s it. Historically, the value of the currency was measured relative to gold and/or silver.  Up until 1971, the US dollar was pegged at $35 to one ounce of gold. Gold has certain monetary characteristics that that make it stable in value, which is why it has been used for centuries to define money.  When a currency’s value is stable, there is little to no inflation.


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