Inflation is …
Inflation is one of the most misunderstood concepts in finance, perhaps because the term is often used imprecisely. I will use the word precisely in this essay, not in the sense that I will use it in the only “correct” way, but in the sense that when I use it here, it will mean the very specific thing I intend it to mean.
Irving Fisher’s Equation of Exchange connects money and economic activity:
MV=PQ
For purposes of this essay, “inflation” means a positive change in P, and “deflation” means a negative change in P. Thus, as used here, inflation means a general rise in nominal prices, the kind of thing that allows us to say that $X in 1927 is the equivalent of $Y in 2020, not a change in real prices for individual goods or services (transistors or tummy-tucks) or in the price of assets, which I consider a reduction in the price of risk. Fisher’s equation may hold for a segment of the economy, but in this essay I am concerned with a particular economy: the one that uses the US dollar as its medium of exchange. That economy is bigger than the US alone, which is why Q cannot by measured as the goods and services comprising GDP.
Inflation is a tax.