The Costs Of Inflation

Steve Horwitz explains the costs of inflation at the 2011 Advanced Austrian Economics Seminar in Irvington, NY.

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.

Horwitz graduated cum laude with an A.B. in Economics and Philosophy from The University of Michigan in 1985, where he was also active with several libertarian student groups and where he wrote and performed with the Sunday Funnies/Comedy Company sketch comedy group. He received his M.A. and Ph.D. in Economics from George Mason University in Fairfax, Virginia.

Inflation’s effects on an economy are various. Negative effects of inflation include a decrease in the real value of money and other monetary items over time, uncertainty over future inflation which may discourage investment and savings, and if inflation is rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future.

Steve is the book review editor of the Review of Austrian Economics and the secretary and webmaster for the Society for the Development of Austrian Economics. He has been a member of the Mont Pelerin Society since 1996, and is a member of two group weblogs: Coordination Problem and Liberty and Power.

Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.

In 1989, Horwitz joined the economics department of St. Lawrence University in Canton, New York. Most of Horwitz’s professional work has been in the area of monetary theory and macroeconomics from an Austrian school perspective, with his 2000 book Microfoundations and Macroeconomics: An Austrian Perspective best summarizing that work. He has also contributed to Austrian economics and the history of economic thought as well as the social thought of F. A. Hayek. In recent years, he has been exploring the economics and social theory of the family. His Open Letter to My Friends on the Left in September 2008 was a widely-read libertarian analysis of the mortgage crisis and has been translated into five languages.