Things are heating up.

No, we’re not talking about the weather as winter approaches in the Northern Hemisphere. We’re talking about prices in the US.  

However, to understand what’s going on, we need a better understanding of what we mean by money, inflation, and rising prices.

Before we tackle these three terms, let’s look at another phrase that is used quite frequently, and usually in the wrong way. 

Almost universally, when someone uses the phrase “begs the question,” it’s totally wrong. To beg the question does not mean, literally, “to invite the next question.” Such as, “that stock is down 80%, which begs the question, is management going to get canned?” 

That sounds nice, and it’s how the phrase is almost always used. But it’s not correct. The correct usage relates to logic and circular reasoning, or, to use a little Latin: petitio principii. Meaning that, when asking a question, your answer is assumed in the premise. 

And it’s this circular reasoning piece that we want to hit on this week.

During the week of October 12, the US Bureau of Labor Statistics released two important reports: one on consumer prices (CPI) and another on producer prices (PPI).¹ Both came in hotter (higher) than expected, with PPI coming in at nearly a four-year high. So, naturally, among friends or in your favorite finance periodical, you may have heard that “inflation came in hotter than expected.”  

This doesn’t mean that prices rose on every consumer good or service (Costco blueberries may have fallen this week or, apparently, auto insurance in South Dakota is down this year).² But in general, prices are going up and many folks call that increase “inflation.”   

But, like “begs the question,” this word often gets used incorrectly.  

The issue here is that prices on goods and services do not inflate, but the money supply that purchases them does. Rising prices are often, but not always, a consequence of inflation, which is a rise in the money supply. This distinction matters because if we use the circular reasoning that inflation is the rise in prices, then we miss the actual cause of the rising prices, which leads to petty slogans and broad confusion. 

While this is almost universally misunderstood today, it was well understood pretty much up until World War II—so really not all that long ago (although, we do recognize that for some folks, a long time ago was last month). From Guido Hülsmann’s The Ethics of Money Production, we get the following: “This general understanding can be inferred from popular reference works such as the Funk and Wagnalls Standard College Dictionary (1941), which defined inflation as an “expansion or extension beyond natural or proper limits or so as to exceed normal or just value, specifically overissue of currency.” The same dictionary defined an inflationist as an ‘advocate or believer in the issuing of an abnormally large amount of currency, especially of bank or treasury notes not convertible into coin.’”³ 

More Money, More Heat 

Now that we have our definitional ducks in a row, it’s not all that surprising that the recent readings on both consumer and producer prices are going up. As measured by M2, or the total money circulating in an economy, money supply growth in the US is rising at the fastest rate in over four years.  

Understanding the economy is hard enough. Trying to understand the economy with faulty definitions is nearly impossible. 

The old adage of “too much money chasing too few goods” should really be brought back into the lexicon, because it clears things up far better on the inflation and rising prices front than most things in the press today. 

Hopefully, this short piece clears some things up as well. 

Until next time.