THE NATURE OF THE BEAST
It is often said that inflation is the result of too many dollars chasing too few goods. If the same concept is reworded to say that inflation is too few goods being chased by too many dollars, the math is the same, but the perspective changes.
In the late Roman Empire, the government started shaving 5-10% of the precious metals from coins to make new coins. This increased the money supply without finding new sources of gold and silver, which was inflationary. In more recent times, central banks have monetized government debt through large-scale purchases – in some countries leading to hyperinflation of over 1,000% per year. This has led many to say that inflation is always a monetary phenomenon.
On the other side of the ledger, inflation can be the result of a scarcity of natural resources or housing, or insufficient infrastructure to move materials efficiently. Famously, prior to the collapse of the Soviet Union, Russians would pay American tourists $200-300 for a pair of blue jeans that retailed for $25 in the US – a case where there was demand for an existing product that was unavailable in that market.
So, inflation is really an imbalance between supply and demand, with demand funded by additional units of currency. While inflation in the abstract is fine for central bankers to debate, consumers and investors are more interested in how it affects them. Consumers have to deal with inflation in real-time by reducing spending, securing wage increases, or tapping savings; and investors face the prospect of reduced long-term purchasing power for their portfolios.
