Why the Definition of Inflation Was Intentionally Distorted

The political nature of government causes it to overspend as officials expand its scope and reach. Government budget deficits typically lead to monetary inflation (currency and credit creation), resulting in price inflation and other detrimental effects. In ancient and medieval times, governments debased metallic currency by mixing silver and gold coins with cheaper base metals to allow for deficit spending. Similarly, modern governments engage in currency debasement through more advanced methods.

Contemporary governments continue to maintain a policy of monetary inflation due to persistent budget deficits. Revenue from taxation often falls short of covering the overall budget for the numerous government programs and bureaucratic agencies established over the past decades in the current statist and militarist global order established by Western imperial states.

It is essential to recognize that, contrary to the established consensus, the current Western global order is statist, characterized by coercive, centralized, and repressive government management of economies and rampant (monetary, asset, and price) inflation rather than capitalist market economies with a sound currency system.

Without monetary inflation, governments would be restricted to a limited or non-interventionist role, which is crucial for ensuring economic stability, prosperity, and peace within and among societies. However, since the government is the inherently coercive and repressive member of society that holds the power to legislate and enforce legislation through state aggression, it is typical that governments, through deceptive and coercive methods, undermine a sound currency system, such as a gold-based currency, in favor of monetary systems that facilitate currency and credit creation, preferably a fiat currency system, as historical evidence indicates.

That is why the state’s preferred monetary system involves a fiat currency protected from competition and imposed on the nation through legal tender laws instead of a sound monetary system and monetary freedom, whereby other currencies can emerge and circulate parallel to the state-issue national currency. That is also why, from the state and statist economic perspective, the definition of inflation had to be distorted—to facilitate ongoing government deficit spending made possible by continued monetary inflation while presenting such a policy as economically beneficial. The modified definition of inflation gives governments seemingly limitless spending capacity, primarily achieved through debt monetization in the current monetary order, the fiat dollar standard.

This article has three parts. The first discusses the evolution from the original to the contemporary definition of inflation. The second explains why the definition of this crucial economic concept was modified. The third reveals the arbitrary nature of inflation targeting and its implications.

Original versus Present Definition

The definition of inflation has been altered to signify a general rise in prices across the economy, diverging from its original meaning. This modification in the meaning of inflation is not trivial, a mere semantic change. It is a fundamental economic distortion with ruinous consequences for society. The initial definition of inflation was the artificial expansion of the supply of money and credit. That is currency debasement or money printing in more familiar terms.

Per the original definition, a generalized increase in prices of goods and services is a primary and most noticeable detrimental consequence of inflation and not inflation itself. In the contemporary statist world, however, the official and textbook definition of inflation is a generalized increase in the prices of goods and services, measured by the Consumer Price Index (CPI) in nearly all countries. The new definition of inflation is inaccurate and misleading—deliberately so.

Ludwig von Mises (p. 420) remarks:

The semantic revolution which is one of the characteristic features of our day has also changed the traditional connotation of the terms inflation and deflation. What many people today call inflation or deflation is no longer the great increase or decrease in the supply of money, but its inexorable consequences, the general tendency toward a rise or a fall in commodity prices and wage rates. This innovation is by no means harmless. It plays an important role in fomenting the popular tendencies toward inflationism.

Henry Hazlitt (p-1-2) similarly points out:

Inflation is primarily caused by an increase in the supply of money and credit. In fact, inflation is the increase in the supply of money and credit. If you turn to the American College Dictionary, for example, you will find the first definition of inflation given as follows: “Undue expansion or increase of the currency of a country, esp. by the issuing of paper money not redeemable in specie.”

In recent years the term has come to be used in a radically different sense. This is recognized in the second definition given by the American College Dictionary: “A substantial rise of prices caused by an undue expansion in paper money or bank credit.” Now obviously a rise of prices caused by an expansion of the money supply is not the same thing as the expansion of the money supply itself. A cause or condition is clearly not identical with one of its consequences. The use of the word “inflation” with these two quite different meanings leads to endless confusion.

The current definition of inflation as a general increase in prices of goods and services has led to much confusion and removed from the equation the actual and primary cause for an across-the-board price increase—a policy of artificial currency and credit supply expansion. With the original definition of inflation out of mainstream textbooks and economic discourse, economists, politicians, media pundits, and the public face widespread confusion. Endless debates persist about the causes of continuous increases in the prices of goods and services in the economy.

Confusion is so pervasive that nowadays, almost anything can be blamed for causing inflation under the prevailing definition. Greedy corporations, the weather, and even consumers in some circles are blamed for the rampant price inflation affecting most economies today. For instance, it was reported that during the Zimbabwean hyperinflation, the governor of the Reserve Bank of Zimbabwe (the country’s central bank) blamed the high inflation on droughts.

With the current distorted and misleading definition of inflation, almost anything, however absurd, can be named as the cause of price inflation. Meanwhile, mainstream explanations for the origin of inflation disregard that government deficit spending leads to monetary inflation, which in turn causes price inflation.

From the mainstream (statist) economics perspective, the core of which is Keynesian economics, inflation has various causes, such as demand-pull inflation, which is an inflation type caused by increased demand for goods and services outmatching supply; cost-push inflation, which is inflation resulting from a broad increase in the cost of production factors, and built-in inflation, which is another type of inflation associated with people demanding wage increases to keep up with the rate of (price) inflation in the economy as they expect the present inflation rate to continue or rise.

While various reasons are given to justify inflation in mainstream economic discourse, none point to excessive government spending and fiat monetary policy practices enacted to facilitate government deficit spending as the cause of price inflation. The truth is that the established currency debasement policy is the primary cause of rising prices. The departure from the original and accurate definition of inflation, which is the artificial expansion of the money and credit supply, has led to widespread confusion and disorientation within the economics field, spilling over to the broader society.

Thus, to better understand and navigate the confusion surrounding the nature and causes of inflation in the current statist world of fiat monetary systems, it is beneficial to specify the various types of inflation pervading contemporary economies. In a paper discussing the nature and ruinous implications of fiat monetary systems, I point out:

The essence of fiat monetary systems is inflation, the artificial expansion of the supply of money and credit per its original definition. Due to the existing confusion stemming from the prevailing distorted definition of inflation, now defined as a generalized increase in the prices of goods and services, there is a pedagogical need for clarification. Monetary inflation refers to the creation of money and credit (money printing). Price inflation is a generalized [though uneven] increase in goods and services prices, primarily caused by monetary inflation. Asset price inflation is the artificial increase in financial asset prices resulting from a policy of monetary inflation.

It is crucial to grasp that, contrary to the prevailing academic and popular view, the United States, other Western countries, and the current global order established by Western imperialist states are not capitalist (market-driven) systems but rather heavily statist systems.

The world is characterized by state-managed economies, employing top-down, technocratic methods that involve coercive, confiscatory, and repressive policies, thereby exerting extensive centralized socioeconomic control. (For a comparative analysis of the various socioeconomic systems, see The Scale of Statism.)

While Western nation-states have long been statist economies, the work of British economist John Maynard Keynes in the early 20th century caused a fundamental shift in mainstream economics from primarily market-based to state-centered economics. This shift, which I call the Keynesian shift, has provided the intellectual basis for centralized state management of economies and has since kept the economics field state-centered and state-serving.

Contemporary economics has developed in the context of a statist and militarist global order characterized by centralized socioeconomic management, economic rivalries, protectionism, geopolitical power plays, conflicts, and war. A salient aspect of this context is the continued artificial expansion of the currency and credit supply. Inflationary monetary policy has long been a decisive, enabling factor in sustaining warfare and other government programs, hence the need for a redefinition of inflation away from its original meaning.

A Malicious and Destructive Distortion

Following World War I, the definition of inflation was deliberately distorted from its initial form, the artificial expansion of the supply of money and credit, to the prevailing distorted one, defined as a general increase in prices of goods and services.

This change has been insidiously destructive and occurred parallel to the Keynesian overturning of the economics field during the first part of the 20th century. It is no overstatement to affirm that systems based on fiat monetary practices would not last in the modern world without the enabling facilitation that a distorted definition of inflation provides.

The definition of inflation has been modified to:

1. Facilitate continued currency and credit creation (monetary inflation, money printing);
2. Divert attention from and hide the actual cause of price inflation and other detrimental issues that invariably follow from currency debasement and credit manipulations;
3. Shield the government and its monetary agency (the central bank) from culpability for causing price inflation and loss of the currency’s purchasing power due to monetary inflation;
4. Eliminate or minimize public concerns about the reason for the currency’s continuous loss of purchasing power, thereby preventing a popular revolt;
5. Create confusion and disorientation by obscuring the truth where honesty and transparency are essential: the monetary system.

1) Redefining inflation from its original meaning was necessary from the state and statist economics perspective to facilitate the continuation of and provide intellectual justification for the currency and credit creation policies that most Western governments, especially the imperial ones, have been engaged in throughout their history, with periodic pauses. Pinpointing the establishment of the current United States central bank, the Federal Reserve, in 1913 as the beginning of the present era of centralized fiat monetary systems, it becomes evident why such a redefinition was implemented and why it occurred parallel with the Keynesian shift in mainstream economics during the first half of the 20th century, which includes the interwar period.

World War I (1914-1918) marked the beginning of the end of sound monetary systems in the West and, consequently, in the current world. Inflationist monetary policy became more institutionalized after World War I, and the gold standard began to be gradually dismantled in that period. An inflationist system benefits tremendously from such a redefinition of inflation.

2) The new definition of inflation further facilitates a policy of monetary inflation (currency and credit creation), as it is no longer seen as inflationary and, hence, detrimental and objectionable. Given that inflation is redefined as a general increase in the prices of goods and services, this effectively removes monetary inflation as the primary cause and creates room for various reasons being brought forth for causing price inflation.

The new definition also diverts attention from and obscures the primary cause of price inflation, boom-bust cycles, economic instability, and other destructive issues that invariably follow a policy of currency debasement and credit manipulations. The Keynesian shift significantly bent (distorted) the economics field toward the state and the dominance of state-centered economic models. Consequently, currency and credit creation went from being seen as inflationary and harmful to being (tacitly) central in economic models and policy decisions.

3) The new definition also helps shield governments and their monetary agency, in most countries, a central bank, from culpability for causing price inflation and the currency’s continuous loss of purchasing power due to a methodical artificial money supply expansion. The redefinition of inflation, a pivotal event in the economics and monetary thought landscape, proved particularly helpful after the remaining link to gold was removed by the Nixon administration in 1971.

This marked the end of the Bretton Woods gold exchange arrangement and the beginning of the present global monetary order of completely fiat currency systems—the fiat dollar standard. Since 1971, currency and credit creation policies have become more entrenched and legitimized in the West and, thus, worldwide. Promoting a distorted and misleading definition of inflation is essential in the contemporary world of statist socioeconomic systems with inflationary fiat currency systems.

4) The prevailing definition of inflation also helps eliminate or minimize public concerns about the currency’s continuous loss of purchasing power and the economic dispossession (p. 19) that a policy of monetary inflation entails. The public’s unawareness of the fraudulent and confiscatory nature of fiat monetary practices helps prevent a potential popular revolt against currency debasement.

As remarked earlier, fiat monetary practices would not last in the modern world without the enabling facilitation that a distorted definition of inflation provides. Considering that the new definition removes monetary inflation from the equation, and indeed, currency and credit creation has become legitimized and lauded as beneficial in the contemporary world after the Keynesian shift, confusion abounds and the public remains unable to pinpoint the actual cause of the continued loss of purchasing power and increasing prices.

5) The distorted definition of inflation creates confusion and disorientation, which benefits a system supported by monetary inflation. It is fundamentally about deception and obscuration of truth in a vital element where there must be honesty and transparency because money is the cornerstone of indirect exchange societies and the fundamental good in the economy.

Money is the lifeblood of the economy, as it represents purchasing power, intermediates economic transactions, and communicates crucial information, incentives, and disincentives that guide economic decision-making and coordinate the economy in a noncoercive and optimal manner. Therefore, it is imperative that a nation’s currency be as honest, reliable, and consistent as possible. When the national currency is distorted, debased, and manipulated, a structural injustice is established, and the economy becomes distorted and debilitated, marked by instability and crises.

The current definition of inflation—a general increase in the prices of goods and services—conceals the truth. Thus, the public is not aware that price inflation and the currency’s loss of purchasing power result from government and central bank policy choices. The public is confused, believing that inflation is a natural economic fact of life that monetary officials must fight.

This confusion also helps legitimize central banks’ existence, as they are portrayed in mainstream economic discourse and media outlets as the heroes who come to the rescue and fight price inflation. When the cause of a problem is unknown or concealed, or more tragically, it is presented as beneficial, one becomes unable to identify, much less root it out definitively.

Amid the prevailing economic confusion, usual suspects or scapegoats such as “greedy businessmen” or “greedy corporations,” “price gouging,” or even climatic issues are put forth as the cause for rampant price inflation. Moreover, economic disinformation is systematically cemented in people’s minds through the school system, whose curriculum is controlled by the government’s department or ministry of education, consolidating state-serving economic models and definitions.

Figure 1: Central banks are highly prominent institutions in the current statist global order, and central bank officials are among the most exalted members of society.

Another significant detrimental consequence of the distorted definition of inflation is the entrenched yet false belief that continuous price inflation and loss of purchasing power are natural facts of economic life. This is not the case. Price inflation has repeatedly plagued many economies, especially Western ones, since the Greeks and the Romans to today, but it is not natural. Price inflation is an artificial and impoverishing consequence of the practice of monetary inflation, which is typically enacted to accommodate government deficit spending.

Rampant price inflation and economic instability are the exception, not the norm, in the annals of human and economic history. Commodity money, primarily silver and gold, has been the basis for currencies worldwide for thousands of years, offering remarkable and enduring economic stability to societies whose authorities did not engage in currency debasement. In other words, continuous price inflation and loss of purchasing power are not natural occurrences in economic life. They are artificially created and perpetuated through fiscal and monetary policy choices.

Since World War I, especially since 1971 (the start of the current fiat era), the world has experienced constant price increases, continuous loss of purchasing power, currency crises, economic turmoil, more frequent and destructive boom-bust cycles, stagnating growth, and highly indebted, heavily taxed, unstable, and troubled economies globally. The chaotic and crisis-ridden global economic landscape since World War I is primarily caused by the contemporary policy of currency and credit creation (money printing) and the Keynesian shift, which overturned the economics field and led to full-fledged state management of the economy.

Surveys show that the public considers (price) inflation to be a top economic issue affecting many countries today. For example, a report notes that many Americans think that “corporate greed, profiteering, and price gouging” are the leading causes of the current inflation crisis in the United States, where price inflation reached a 40-year record high in 2022.

Even more concerning, the same report found that most people surveyed also believe that the government should intervene and address this problem. Unaware that the current inflation crisis is caused by government and central bank policies, a significant portion of the public looks to the entities responsible for the inflation problem to solve the issue.

The extent of economic misinformation and miseducation that prevails in the present statist world is staggering. Perhaps if the U.S. public was aware that since the establishment of the current U.S. central bank in 1913, the dollar has lost over 95 percent of its purchasing power compared to gold, they might not have blamed the inflation crisis on ‘corporate greed, profiteering, or price gouging.’ Government policies and the current fiat monetary system are the causes of today’s increasingly inflationary and chaotic economic situation, not corporate greed, speculators, free-market capitalism, or the weather.

Contemporary economies are strained by monetary inflation, asset price inflation, price inflation, and even shrinkflation. These are real types of inflation afflciting economies today. But greedflation is nonsense. There is no such thing as across-the-board price inflation caused by business greed.

In a fiat monetary order, where the money and credit supply is artificially and methodically expanded, price inflation invariably becomes the norm, whether mild or severe. This gradual inflationary process erodes the currency's purchasing power, leading to consistently higher prices. Note that economic productivity and output improvements usually help counteract the adverse effects of monetary inflation in more advanced economies.

In developing regions with less stable, productive, and diversified economies, the destabilizing and destructive effects of fiat monetary practices tend to appear more rapidly and have a more impoverishing impact.

As the economist Hans Sennholz remarks:

It is not money, as is sometimes said, but the depreciation of money — the cruel and crafty destruction of money—that is the root of many evils. For it destroys individual thrift and self-reliance as it gradually erodes personal savings. It benefits debtors at the expense of creditors as it silently transfers wealth and income from the latter to the former. It generates the business cycles, the stop-and-go boom-and-bust movements of business that inflict incalculable harm on millions of people.

The distortion of the definition of inflation and the subsequent institutionalization and legitimation of monetary inflation reflect a severe moral deficit in Western economic thought and policymaking. This is unsurprising given the ethics-free (utilitarian, positivist, empiricist) nature of Western economics and social sciences.

The distortion of the definition of inflation, the subsequent abandonment of gold as an independent anchor of currency honesty, stability, and reliability, and the establishment of the fiat dollar standard constitute one of the most egregious violations of universal moral principles and standards of justice in human relations. This situation and other economic distortions represent a crime against humanity committed by the West.

Inflation Targeting is Arbitrary

Inflation targeting, in some cases known as price level targeting, is a monetary policy tool maintained by central banks, where actions are taken to keep price inflation, as measured by CPI (consumer price index) or similar, on or around a chosen figure, known as the target rate. The current rate for the United States central bank, the de facto central bank of the world, and other leading central banks is 2 percent.

The central bank of New Zealand first devised inflation targeting in the early 1990s, and it is a policy measure that falls within the broader contemporary statist approach of centralized fiat monetary management.

Inflation targeting rests on the notion that inflation (per the modified definition), which, according to the mainstream perspective, is caused by various factors other than a policy of monetary inflation enacted to facilitate government deficit spending, is detrimental and should, therefore, be managed by the central bank.

Maintaining the price inflation rate (per CPI or PCE inflation) more or less aligned with the target rate of 2 percent anchors (price) inflation expectations and signifies price stability in the current setting, which instills some certainty about future market conditions amid persistent economic instability.

The fundamental issue with inflation targeting is that it is arbitrary. As first pointed out via a social media post, inflation targeting is arbitrary because proponents of this monetary policy tool have not presented evidence, theoretical or empirical, as to why a central bank, for instance, the Federal Reserve, must have a target rate of 2 percent vis-a-vis any other target rate, say 3 percent.

Although the Federal Reserve and other central banks have set a target inflation rate of 2 percent, there has yet to be a clear explanation for why this specific rate is preferable over other rates, such as 1.5, 2.5, 0, or 4 percent. Proponents of inflation targeting have not provided theoretical or empirical evidence to justify why 2 percent is, for these or those reasons, the ideal target rate relative to any other number. In other words, the commonly accepted 2 percent inflation target, a prominent aspect of mainstream monetary economics and central bank policy-making, is arbitrary.

Note that while inflation targeting is arbitrary, it is not thoughtless. The prevailing 2 percent inflation target rate has been thoughtfully chosen, considering average and expected annual money supply growth rates, price inflation expectations, and price inflation anchoring objectives. The primary purpose of inflation targeting is anchoring price inflation expectations to a specific though arbitrary figure, with the current number being 2 percent, as noted.

In the current era of centrally managed fiat monetary systems, which typically result in unstable and troubled economies marked by boom-bust cycles, frequent recessions, and other crises, inflation targeting plays a significant role in anchoring inflation expectations, thereby attenuating uncertainty. This helps participants in capital markets and the broader economy in anticipating and managing volatility. Nonetheless, it is crucial to recognize that inflation targeting is arbitrary, a contrived monetary technique to anchor expectations rather than sound economic science.

Monetarism is a macroeconomic theory of centralized monetary management that advocates for central bank policies to foster economic stability and growth. Monetarism is associated with and was popularized by the economist Milton Friedman, who proposed a rule-based approach to expanding the money supply yearly, known as the K-percent rule. This model argues that the central bank consistently expands the money supply at a constant annual money growth rate (K-percent) in tandem with the annual economic growth rate, represented by gross domestic product (GDP).

The K-percent rule is an arbitrary monetary policy tool similar to the inflation target rate. It involves a constant artificial expansion of the money supply at the selected rate, which typically ranges from 3 to 5 percent per year. This kind of monetary policy can lead to the currency’s continuous loss of purchasing power and is inflationary, per the original definition. The essence of this model is monetary inflation, the artificial creation of money and credit. Monetary inflation is fraudulent and confiscatory and has ruinous consequences for society.

Similarly, the Taylor rule, also known as the Taylor principle, is a monetary policy targeting method based on a mathematical equation developed by the econometrician John Taylor. It seeks to provide central banks, specifically the Federal Reserve, with a tool for fostering economic stability by setting and adjusting short-term interest rates. Like the K-percent rule, the Taylor rule is also a rule-based approach to centralized monetary management rather than a discretionary monetary policy approach.

Centralized monetary management methods such as inflation targeting, monetarism’s “a steady rate of monetary growth at a moderate level” (K-percent rule), the Taylor rule, the McCallum rule, and other monetary policy tools that involve the artificial expansion and manipulation of the money and credit supply are unethical and fraudulent. These arbitrary methods tend to lead to currency debasement, economic instability, price inflation, and other detrimental issues that undermine economic prosperity and social harmony.

Currency and credit creation (money printing) is inflation per the original, pre-distortion definition, leading to price inflation and asset price inflation. This policy constitutes a fraudulent, confiscatory, and redistributive structural injustice inflicted upon society by the state. A monetary policy of currency and credit creation, the core of centralized fiat monetary management, is distortive, destabilizing, and insidiously destructive, as this paper explains.

No matter how highly trained and well-intentioned they may be, economists managing a country’s centralized monetary system, such as the current central bank-managed fiat monetary systems, cannot provide superior monetary and economic outcomes to that of a sound monetary system. The inability to ensure superior economic stability and prosperity under centralized fiat monetary management is a consequential issue that needs to be addressed.

A market-based, commodity-linked currency system remains the morally superior and materially more beneficial approach. As even so-called developed countries face increasingly unstable and woeful economic situations, mainstream economics must acknowledge its monetary management shortcomings and adopt an unpretentious stance.

Conclusion

The distortion of the definition of inflation from its original form—the artificial expansion of the supply of money and credit—to the prevailing definition—a general rise in prices in the economy—is a malicious and destructive economic distortion. This distortion has been instrumental in facilitating the transition from sound monetary systems linked to gold and silver from World War I, following which most currencies were only partially backed by gold, to the Bretton Woods gold exchange system (1944-1971) and finally to the United States under the Nixon administration ending the Bretton Woods arrangement, plunging the world in the current era of central bank-managed fiat currency systems, the fiat dollar standard.

Without this pivotal distortion, the world would not have arrived at the current fiat monetary order, which is marked by rampant (monetary, asset, and price) inflation, currency crisis, crushing debt levels, chronically unstable and stagnating economies, tyrannical government systems, incessant geopolitical conflicts, and war, among other destructive issues that characterized a seemingly advanced and civilized world. This distortion has also played a significant role in the increased disarray in economics and the other social sciences, which are dominated by statist economic models with coercive, fraudulent, confiscatory, and repressive policy implications.

The definition of inflation has been intentionally distorted to 1) facilitate continued currency and credit creation; 2) divert attention from and hide the actual cause of price inflation and other detrimental issues that invariably follow from currency debasement and credit manipulations; 3) shield the government and its monetary agency (the central bank) from culpability for causing price inflation and loss of the currency’s purchasing power due to monetary inflation; 4) eliminate or minimize public concerns about the reason for the currency’s continuous loss of purchasing power, thereby preventing a popular revolt; 5) create confusion and disorientation by obscuring the truth where honesty and transparency are essential: the monetary system. In essence, the definition of inflation has been distorted to deceive, confuse, and facilitate monetary inflation.

It is beneficial to distinguish between the different types of inflation pervading contemporary, state-managed fiat economies to better navigate the confusion surrounding the nature and causes of inflation. Monetary inflation is the artificial expansion of the money and credit supply (money printing), which is the original definition of inflation. Price inflation is a generalized though uneven rise in prices of goods and services across the economy, which is a primary and most noticeable consequence of monetary inflation. Asset price inflation is the artificial increase in financial asset prices resulting from a policy of monetary inflation.