“Higher prices for anything reduces purchasing power which is the definition of inflation.”
Your definition of “inflation” is not correct. First, higher prices are one of the results of inflation; they are not the cause of inflation. Second, if you have to choose between buying X and Y, and you have to buy X as its price goes up, then you will have to cut back on your purchases of Y providing your money supply has remained constant (that is, no inflation). That is not inflation. Your purchasing power is the same; you just have to make different choices as to what you purchase with it -- X or Y; gasoline or beer.
According to Webster's New Universal Unabridged Dictionary published in 1983, the second definition of "inflation" is: An increase in the amount of currency in circulation, resulting in a relatively sharp and sudden fall in its value and rise in prices.
According to The American Heritage Dictionary of the English Language, Fourth Edition, Copyright 2000, the second definition is: A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.
Both of these definitions require an increase in currency, or a devaluing of the dollar. This is what is meant by “reduced purchasing power”.
Having to choose between X and Y, or gasoline and beer, is no different than choosing between paying your taxes or buying beer. When you have to buy one thing, and its price goes up, then you are not able to buy as much of the other things. This is why many people say that higher energy prices act like a tax. Do higher taxes cause inflation? No -- higher taxes, like higher energy prices, only serve to direct your choices.
If you want to plot something against CPI or PPI, plot the real money supply.
And yes, as the dollar becomes worth less, and after many years of accumulated inflation (though it may be small on an annual basis), the oil Gods (OPEC) will finally say "Hey, we need to raise our prices too ..." |
