Inflation Definition

The actual definition of inflation is one of the most controversial issues in monetary economics. Most economists define inflation as a general increase in prices. The Federal Government determines their official inflation rate is based on the Consumer Price Index.

The Consumer Price Index -- or CPI for short -- is an index of prices that the government thinks are important for consumers. When the CPI goes up, the government reports that inflation goes up as well.

Some economists, particularly those of the Austrian School persuasion, believe that this approach to inflation is oversimplified.

Ludwig von Mises, one of the leading Austrian economists in history, had this to say on the definition of inflation way back in 1912:

"In theoretical investigation there is only one meaning that can rationally be attached to the expression Inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange-value of money must occur."

In the next article I'll be explaining my take on the definition war, and will explain what inflation really is, and how we should approach it.