Inflation Is Up, But Are Prices The Cause Or The Symptom?

The Office for National Statistics released a Consumer Price Index (CPI) figure of 2.5% for June, a larger than ‘predicted’ increase from the 2.1% figure in May. The CPI is a measure of the rising price of goods and services, which is more often labelled inflation.

Many believe that these rising prices are due to post pandemic supply chains. However when supply and demand is what drives prices, why after mass unemployment (and therefore lower demand) are they still rising? More over, how can prices have been rising consistently over past decades if the costs of production are being reduced every single day?

The problem is, that the definition of inflation is misused, its meaning bastardised and repackaged by central banks and governments.

It is not that inflation is the indices by which prices, of their own volition, and at random, begin to increase (and suppliers just expect that consumers will gleeful want to pay more). Inflation is that which causes prices to rise.

This is because Inflation, is an increase in the money supply, an arbitrary and unwarranted expansion of cash and credit. Quite literally the amount of money in circulation, for example, bank notes and bank deposit accounts.

Prices rise not because the inherent value of a product or service escalates (because competition ensures that they don’t), but because the amount of money in supply expands, meaning that the number of units we attribute to that product will also need to increase in order for it to be the same ‘price’.

For example, if all the money in the world equated to £1000 and the price of bread was 10p, and then if all the money in the world was increased to £2000, the price of bread would increase to 20p. This is because the value of bread is still equal to the proportion of wealth available i.e. 10p has no value but bread does, it has a value of 0.01% of the units available to purchase it.

And prices are rising fast because this increase in money supply is happening on a vast scale.

According to the Austrian school of economics, between 1980 and 2001 the average inflation rate was 14%. And in 2014 an additional $1.9 trillion net was ‘added’ to the money supply i.e. numbers were moved around on screens by politicians and bankers.

All the while bread still remains bread, so the price rose but its inherent value remains the same percentage of the total money in supply, of which, the rest of us worked hard to earn a proportion of in order to pay for it.

And yet, increases in salaries always lag behind the rate of inflation. This is because this new found fabricated money is used by banks in order to dilute there debt and increase their lending power (and subsequent profit power).

This shows us that the 2.5% increase in CPI is an inaccurate way of measuring inflation, and is merely a measurement of the symptom of inflation.  One which places the blame away from central bankers and onto individuals.

All of this is to say, that when press articles blame unemployment or wealth creators (whose profits gets reduced to accommodate for an increased money supply in an attempt to keep prices attractive to consumers (as demonstrated by the 14% on average increase in money verses the 2.5% CPI) and subsequently also reduce salaries to keep trading viable) on being the reason why we cannot afford goods and services due to rising prices, it is important to remember that this is a misplaced blame and a distraction from the cause.

The real problem comes from the continued behaviour of central banks conjuring inflationary money not inflationary prices.

Alice Farrall BA (Hons) Cert CII (MP) Dip PFS