Sumner, Glasner, Machlup and the definition of inflation

David Glasner has a humorous comment on Scott Sumner’s attempt to “ban” the word “inflation”.

Here is Scott:

“Some days I want to just shoot myself, like when I read the one millionth comment that easy money will hurt consumers by raising prices.  Yes, there are some types of inflation that hurt consumers.  And yes, there are some types of inflation created by Fed policy.  But in a Venn diagram those two types of inflation have no overlap.”

While David partly agrees with Scott he is not really happy giving up the word “inflation”:

“So Scott thinks that if only we could get people to stop talking about inflation, they would start thinking more clearly. Well, maybe yes, maybe no…At any rate, if we are no longer allowed to speak about inflation, that is going to make my life a lot more complicated, because I have been trying to explain to people almost since I started this blog started four months ago why the stock market loves inflation and have repeated myself again and again and again and again.”

The discussion between these two light towers of monetary theory reminded me of something I once read:

“When I began studying economics at the University of Vienna, immediately after the First World War, we were having a rapid increase of prices in Austria and, when asked what the cause was, we said it was inflation: By inflation we meant the increase in that thing which many are now afraid to mention – the quantity of money” (Fritz Machlup 1972)

But hold on for a second Fritz! That’s wrong! Lets have a look at the equation of exchange (in growth rates):


If the rate of growth in the quantity of money (m) equals inflation then inflation must be defined as p+y-v. And then if we assume (rightly a wrongly) that v is zero then it follows that inflation is defined as p+y.

What is p+y? Well that is the growth rate of nominal GDP! Hence, using the Machlup’s definition of inflation as the growth of the quantity of money then inflation is in fact nominal GDP growth.

So maybe David and Scott should not disagree on whether to ban the word “inflation” – maybe they just need to re-state inflation as the velocity adjusted growth of the quantity of money also known as NGDP growth.

PS this definition of inflation would also make David’s insistence that the stock market loves inflation a lot more reasonable.

Leave a comment


  1. One might even say that Sumner is becoming hawkish on “inflation.”


  2. Alex Salter

     /  November 8, 2011

    …And once business owners realize M is going to keep on growing, we’re no longer in the Lucas Archipelago since there’s isn’t a signal extraction problem anymore. Producers don’t make more stuff, they just raise the prices on existing stuff. y (in m+v=p+y) becomes zero. Hence, m=p.

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