Inflation or Deflation? The Debate - Part 2

What is inflation? Ben Bernanke and Ron Paul discussed the definition of inflation recently at this House Financial Services Committee meeting in July. Start watching at 4:40 on for the inflation part, but the rest of the video and Ron Paul's commentary is a great watch. Ron Paul starts out with his bill to audit the Federal Reserve, HR 1207 - of course Bernanke opposes the bill. Next, Ron Paul discusses one of the fundamental tenants of Austrian economics, why and how the Fed causes the business cycle.



So who do I agree with?

First of all, Bernanke's statement that inflation is a rise in prices is not only inaccurate but is also misleading. What prices? Consumer or producer? If a rise in consumer prices is "inflation" as Bernanke says, which government published CPI figure should concerned citizens consult? Headline or core? Seasonally adjusted or unseasonally adjusted? During the Bush administration, the methods for calculating CPI changed from the methods used under Clinton. Should the government publish the old methods, along with the new methods, so that we can compare and contrast and see the real difference? Since these CPI methodology changes have been going on for decades, a comparison from now to the past is nearly impossible.

What I'm trying to say is that the CPI is a joke, and in current form is too rigged in favor of government to produce accurate or actionable results. Check out this white paper to learn more about the flawed methodology behind government statistics, specifically the CPI.

In conclusion, I want the government to answer the question for me, what is inflation? So we turn to Milton Friedman, father of monetarist economics and government economic spokesman in the late 1970s. Why was Friedman a spokesman for the government - and why did the government make this video, starring Friedman? The reason is because inflation was getting so out of hand by 1980, that in order to avoid hyperinflation, the government and Fed were forced to create a massive recession by raising interest rates over 20%, in order to kill inflation. Also, Friedman proved mathematically that price inflation of goods and services (Bernanke's incorrect definition) is caused by an increase in the supply of money. Therefore, increasing the money supply IS inflation, and rising prices of goods, services, commodities, etc are an effect of inflation, or increase in the money supply.