The Ultimate Guide to Inflation
Inflation is a controversial and complex topic. This article looks at 150 years of data across multiple countries to provide a general idea of what inflation is, what to look for, and how to invest with inflationary and deflationary risks in mind.
Merriam-Webster defines inflation as “a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services”.
In other words, if the number of currency units in the system goes up way more than the availability of goods and services in the economy, then we can get supply shortages and price increases.
That dictionary definition is a good place to start, but opens up some obvious questions. Which goods and services are we measuring the price level of when we quantify overall price inflation levels, and with what weighting? Can there be instances where the volume of money and credit goes up a lot and yet prices still remain low, and if so, why would that happen and what would we call that?
This leads to a debate of definitions. Economists of different schools of thought often speak past each other about what inflation is. So, rather than debate which definition is best, we can define three types of inflation, and go from there.
