But... what IS inflation?

The question comes, and I'll answer as best I can.  I'm certainly not an expert, but simply an old man trying to understand the world.

I think inflation is hard to understand because it requires thinking in another direction.  Not just different thoughts, but thinking in a different pattern.

I liken it to something I DO understand, air/fuel ratios on vehicle engines.   Most people think in terms of how much *fuel* the engine is getting, but a good diagnostician thinks in terms of ratios.  Too much fuel is also saying not enough air.  Now, most folks only consider the fuel side of that equation, and ignore the air.

Inflation is like that, in we are talking about ratios.  Percentages.   Not 'This Vs. That', but 'This COMPARED to That'.   Like air/fuel ratios, most people tend to think in terms of the prices they must pay for goods to meet their families needs. They almost never think in terms of the value of the money they are paying with.

Inflation means the value of the *money* has gone down, which we now perceive as the prices going up.

Lets do apples to cash.   We'll postulate there is one, exactly ONE apple left in the whole world, and two people want it.  Those two people have exactly one dollar each, so we know the apple will fetch at most one dollar.

Now, what happens if those two people have *two* dollars each?  Well, obviously the price on that apple may now conceivably reach two dollars, or double it's previous cost.

Did the value of the apple double?  No..... the amount of cash chasing the apple doubled.

Translate that in a bigger picture.  We have a US 'Money Supply'.   It's basically the cash and easily fungible assets of all the people and companies in the United States.  That is the two dollars those apple buyers had.

What the Money Supply is chasing are all the goods and services in play in the United States, or the world.   Now, would you expect the amount of goods and services to change dramatically overnight, or even in a years time?  No.  That would be wildly traumatic, inexplicable, and uncalled for.

What about that Money Supply? You know.... the cash that's chasing the apple?  Oh Pilgrim.... yes, that can change..... and has.

I present a chart......

This represents the M2 US Money Supply.  We can see that it has grown just in the course of this year alone.  These are the dollars chasing the apples.

Now, the number of people holding this money supply has not really changed, and the number of apples on the market has not changed, so what happened?

The US government has created more money out of thin air, so politicians can spend it.   That means the value of all the other US money already in existence DROPPED by the same percentage as new money added to the existing money.

More money, now chasing the same number of apples.  That means apples will bring more money, which appears to us as inflating prices.   It actually means the money has less value because inflation taxed away the wealth we stored in our cash.

That's inflation.