A column in the Wall Street Journal reminds us, by default, of the strange theories of inflation that are lying around. Inflation seems to be conceived as the mysterious increase of some prices that must be caused by some (bad) people somewhere, who demand more units of “aggregate output” (a sort of dark matter) for themselves. If these people are bad capitalists, the increase in something is called “greedflation”; bad workers, and we speak of “wageflation.” It is some mysterious somethingflation but, strangely, nobody speaks of “rulerflation,” perhaps out of respect for the leaders of mankind. (See “As Greedflation Starts to Fade, Wageflation Creeps In,” Wall Street Journal, July 6, 2023.)
Recently, the ridiculous idea circulated that Beyoncé’s concert in Stockholm had accelerated inflation in Sweden—“beyoncinflation,” we should call it. If some stones became more expensive, would it be useful to call the phenomenon “stoneflation”? (See “The Beyoncé Effect: Sweden’s Inflation Feels the Hit,” Wall Street Journal, June 14, 2023; “Beyoncé Blamed for Stubbornly High Swedish Inflation,” Financial Times, June 14, 2023.)
Without claiming any originality, I propose another way to look at inflation. Its advantage is to have its roots in the standard economic way of looking at things, to be consistent with the analytical tools of economics—even if the ultimate theory of inflation one may build on that foundation may be more complex.
Suppose a constant stock of money, whether gold or any sort of paper or anything that people generally consider to be a convenient medium of exchange. Some selfish individuals somewhere think they will improve their individual situations by consuming more of good B. (You may think “B like Beyoncé show,” but it can be any other produced good). They must of course consume less of good A. The reason is that resources are scarce. To produce more B, the economy must produce less A (along its production possibility frontier or PPF). Being bid up, the relative price of B increases, which is the same as saying that the relative price of A decreases. Alternatively, we can say that, on the PPF, the opportunity cost of B increases and the opportunity cost of A decreases. Of course, the remuneration (wages or capital values) of the producers of A diminishes, and the remuneration of B’s producers increases. Nobody can speak of inflation. There is no badflation! Why?
I suggest that we can’t rationally think about inflation without first answering this question.
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