The Real Meaning of Inflation

INFLATION IS MUCH MORE THAN RISING CONSUMER PRICES (FIVE-MINUTE READ)

Hey there, fabulous readers! 🌟

I recently stumbled upon a gem of an acronym: “TL;DR.” If you’re wondering, it stands for “too long, didn’t read,” and it’s pronounced “te-el-de-ar” (or so Mr. Grok tells me). Now, let me just say, my last essay, titled “All Eyes on Jackson Hole” clocked in at around 5500 words. Yes, I know—enough to make even the most dedicated reader consider taking a month-long vow of silence just to recover!

So, for those of you who TL;DR’d that piece, I’ve conjured up a bite-sized version—think of it as the snack-sized chocolate bar of essays! 🍫 It’s a speedy five-minute read designed to prick your brain while keeping your attention span intact.

I sincerely hope that after this quick taste, you’ll be tempted to dig into the full essay or check out the video version linked below.

Thanks a million for sticking with me, hit that “like” button, and stay alert for some shiny updates on precious metals coming your way in just a few days.

Stay liquid, my friends.

HardmoneyJim, September 8, 2025

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Today we’re going to talk about the real meaning of inflation.

Two weeks ago., right here in the mountains of Grand Teton National Park near Jackson Hole, all eyes were on the Fed for its big annual meeting. This is not just any conference. It’s perhaps the most anticipated economic summit of the year, and it brings some of the world’s most famous economists right here to my doorstep.

As expected, inflation was a hot topic. You can bet the term echoed through the halls of Jackson Lake Lodge hundreds of times. After all, inflation is considered the most critical economic challenge of our era.

But what is inflation? The word means different things to different people, and its usage has changed drastically over time.

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Two Competing Definitions

According to my Oxford English Dictionary, dated 2002, inflation is defined as “an undue increase in the quantity of money circulating in relation to the goods available for purchase.” The popular definition is “an unwarranted general rise in prices, leading to a fall in the value of money.”

The first definition is close to the one I prefer: an undue increase in the quantity of money. Notice how different this is from the second, which refers to a general rise in prices. That latter definition is closer to what most economists use today.

In recent years, the Fed and other central banks have adopted and refined the popular version. Inflation, for them, is an increase not in money supply, nor in asset prices like homes or stocks, but specifically in consumer prices as measured by official indexes.

So inflation, according to the Fed, is a rise in the prices of eggs, cars, or rent. Their favored measure is the Personal Consumption Expenditures (PCE) index. If the PCE rises by 4% year over year, then inflation is 4%. Moreover, they now say 2% inflation is “just right,” while anything higher or lower is undesirable.

Right now, the PCE measure is about 2.6%. So by their definition, inflation is still too high.

But does defining inflation in terms of consumer prices really help us understand it? Does it clarify what it’s like to live in an inflationary economy?

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The Purpose of Definitions

The philosopher Ayn Rand once explained that the purpose of a definition is to distinguish a concept from all other concepts by identifying its most fundamental characteristic. That’s what makes the concept unique.

Take the example of “man.” If we defined man as “the mammal with an opposing thumb and forefinger,” it might be true, but it doesn’t tell us what makes humans different from apes. A better definition is “the rational animal,” because rationality is what fundamentally differentiates humans from all other animals.

Likewise, defining inflation as “rising prices” is like a doctor diagnosing a patient with fever, and then plunging him into an ice bath to reduce temperature. The doctor might succeed in lowering the symptoms, but he has ignored the underlying illness. He hasn’t treated the cause.

Defining inflation as simply rising consumer prices obscures the real issue. It prevents us from distinguishing between price increases caused by money creation, by shortages of goods, or by changes in consumer preferences. A hurricane that knocks out oil production and temporarily raises gas prices is not the same as the government printing money—but under today’s definition, both are labeled “inflation.”

This confusion provides cover for politicians and economists. They can blame inflation on weather patterns, pandemics, or wars, and absolve themselves of responsibility.

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A Warning from Mises

Ludwig von Mises warned about this semantic confusion as early as 1951. Inflation, he said, had always meant an increase in the quantity of money and bank deposits. But by redefining it as rising prices, we lost the ability to name the cause. Policymakers ended up “fighting” inflation by trying to suppress prices, while leaving the real culprit untouched.

That’s why it’s misleading to define inflation as an increase in consumer prices. A better definition, drawn from George Reisman’s Capitalism, is this:

“Inflation itself is not rising prices, but an unduly large increase in the quantity of money caused almost invariably by the government.”

That gets to the heart of the matter. Inflation is government-driven money creation. Rising prices are only one necessary and inevitable consequence.

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The Consequences of Inflation

Unproductive money creation doesn’t just cause higher grocery bills. It leads to distorted investments, unjust wealth transfers, stagnant wages, ballooning sovereign debt, and even the corrosion of public morality as gambling and speculation replace prudence and production.

To see this clearly, consider a modern example: the Japanese asset bubble of the 1980s.

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Japan’s Lost Decades

In the 1980s, the Bank of Japan used its system of “window guidance” to direct massive amounts of new lending into real estate. As the 18th-century economist Richard Cantillon would have predicted, the result was skyrocketing property and stock prices.

Between 1985 and 1989, stock prices rose 240%. Land prices rose 245%. At one point, the land around Tokyo’s Imperial Palace was valued as highly as the entire state of California.

This wasn’t genuine productivity. It was an asset bubble fueled by unproductive money creation. And when the Bank of Japan pulled back, the crash was devastating. Stocks fell 80%. Land prices collapsed by more than 80%. Over 200,000 companies went bankrupt. Five million Japanese lost their jobs. Suicide became the leading cause of death for men aged 20 to 44.

The so-called miracle economy turned out to be a mirage built on easy money. And the cost was decades of stagnation and suffering.

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The Pattern Repeats

The Japanese case is not unique. The same pattern can be seen in America’s housing bubble in the 2000s, in the stock market boom of the 1920s, and in the asset inflation created by quantitative easing after 2009.

New money is directed into specific markets. Asset prices rise. Speculators get rich while ordinary people are left behind. When the flow slows or stops, the bubble bursts and the economy collapses.

This is why definitions matter. If we continue to define inflation as “rising consumer prices,” we will continue to misunderstand and mistreat the illness.

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The Last Word

Economist Henry Hazlitt described inflation this way:

“It discourages all prudence and thrift. It encourages squandering, gambling and reckless waste of all kinds. It often makes it more profitable to speculate than to produce. It tears apart the whole fabric of stable economic relationships. It plants the seeds of fascism and communism. It leads men to demand totalitarian controls. It ends invariably in bitter disillusion and collapse.”

Hazlitt’s warning still applies. Inflation is not just an annoyance at the grocery store. It is a government-driven expansion of money that reshapes entire societies, misdirects whole economies, and ultimately destroys trust.

The problem is far greater than a rise in consumer prices. Until we recover the proper definition, we’ll keep treating the fever while ignoring the disease.