ABSTRACT
A monetary definition of inflation (which focusses on the phenomenon to be explained) is “a sustained upward trend in the level of prices”. It may by implication be difficult to detect inflation. Not all upward price movements are inflationary — high interest rates for example, are deflationary not inflationary — and upward price changes may reflect adjustments in demand and supply to disturbances in the economy. Prices may move up after devaluation as demand is switched to domestic production, or a bad harvest, by reducing output, may raise prices if velocity does not change. Price indicators may not adequately reflect an inflationary process either because they weigh relatively stable or insignificant elements too heavily, or if they underallow for improvements in the quality of goods purchased at higher prices. (The Stigler report suggested that the inflation indexed during the late 1950’s period of tight money might be due to overstatements of the rate of inflation from such factors.)
