So many near-misses on this thread; it's probably worth wading through and trying to straighten a few folks out.
Part 1 - Inflation
First, inflation (deflation) is a general sustained increase (decrease) in prices. People who try to define it differently are trying to sell you a particular political viewpoint or defunct economic model, most likely both (we'll get to Galen in a minute).
Inflation (deflation) occurs when the balance of aggregate demand (spending) in an economy exceeds (falls short of) the economy's capacity to supply and prices begin to rise.
Some people talk about "supply inflation" where the supply of a particular good or service in the economy is reduced to the extent that the demand for it begins to make the price for the good/service rise, often soaring. This is what happen in the 1970s with the Arab Oil Embargo; it's complicated because energy (oil) underpins so much economic activity that all prices began to rise and it begins to look like general "demand inflation." If it had been a coffee embargo, we'd have a lot of sleepy people but the impact on the prices of all other goods/services would be hard to measure if it occurred at all.
The key is how sustained is the price(s) increases and does it get mitigate by dealing with a particular good/service. For example, the deregulation of natural gas prices, and the near immediate switch of oil-fire electric utilities to natural gas nearly crushed the Arab economies and the inflation in the US and other oil importers quickly resided.
What we are actually talking about when we are concerned about inflation (deflation) is the general substanted increase (decrease) in prices, resulting from increases (decreases) of demand/spending relative to the economy's capacity to meet that demand/spending.
Due to decades of brainwashing, here's what a lot of people don't get - some inflation is necessary for a growing healthy economy.
Without some inflation, we would all still be on subsistence farming - no cars, no Internet, no music other than what a family member might have to offer - basically, pretty shXty lives. The reason for that is one only needs to think about what is actually happening when inflation occurs - demand is exceeding supply (and what is happening when the opposite is occurring). In the face of increasing demand, a smart business person can raise his prices only so much before his customers will stop paying or before another person decides they can provide that good or service as well and take market share and profit away from that business person. At some point, in the face of rising demand, a business person is going to increase his capacity by hiring or investing in capacity, perhaps even coming up with a new way/technology to meet that demand with lower costs - i.e. he grows the economy, and that's healthy. If demand is weakening, the exact opposite happens - that's an unhealthy economy.
Bottom line - pray for some healthy inflation.
Next: Part 2 - Too much inflation = bad, BUT let's remember how it comes about.
Part 1 - Inflation
First, inflation (deflation) is a general sustained increase (decrease) in prices. People who try to define it differently are trying to sell you a particular political viewpoint or defunct economic model, most likely both (we'll get to Galen in a minute).
Inflation (deflation) occurs when the balance of aggregate demand (spending) in an economy exceeds (falls short of) the economy's capacity to supply and prices begin to rise.
Some people talk about "supply inflation" where the supply of a particular good or service in the economy is reduced to the extent that the demand for it begins to make the price for the good/service rise, often soaring. This is what happen in the 1970s with the Arab Oil Embargo; it's complicated because energy (oil) underpins so much economic activity that all prices began to rise and it begins to look like general "demand inflation." If it had been a coffee embargo, we'd have a lot of sleepy people but the impact on the prices of all other goods/services would be hard to measure if it occurred at all.
The key is how sustained is the price(s) increases and does it get mitigate by dealing with a particular good/service. For example, the deregulation of natural gas prices, and the near immediate switch of oil-fire electric utilities to natural gas nearly crushed the Arab economies and the inflation in the US and other oil importers quickly resided.
What we are actually talking about when we are concerned about inflation (deflation) is the general substanted increase (decrease) in prices, resulting from increases (decreases) of demand/spending relative to the economy's capacity to meet that demand/spending.
Due to decades of brainwashing, here's what a lot of people don't get - some inflation is necessary for a growing healthy economy.
Without some inflation, we would all still be on subsistence farming - no cars, no Internet, no music other than what a family member might have to offer - basically, pretty shXty lives. The reason for that is one only needs to think about what is actually happening when inflation occurs - demand is exceeding supply (and what is happening when the opposite is occurring). In the face of increasing demand, a smart business person can raise his prices only so much before his customers will stop paying or before another person decides they can provide that good or service as well and take market share and profit away from that business person. At some point, in the face of rising demand, a business person is going to increase his capacity by hiring or investing in capacity, perhaps even coming up with a new way/technology to meet that demand with lower costs - i.e. he grows the economy, and that's healthy. If demand is weakening, the exact opposite happens - that's an unhealthy economy.
Bottom line - pray for some healthy inflation.
Next: Part 2 - Too much inflation = bad, BUT let's remember how it comes about.