By redefining inflation as consumer prices, we distort how we interpret policy, inequality, and markets.

Americans often say inflation feels higher than what official statistics report. For most of economic history, inflation had a clear meaning: an increase in the supply of money. Rising prices were simply the consequence of inflation, not the definition. 

“Inflation is an increase in the quantity of money and credit,” Henry Hazlitt explained in Economics in One Lesson. “Its chief consequence is soaring prices.” 

In other words, as the economist Ludwig von Mises observed, inflation is a policy.

If you tune into CNBC or Fox Business today, however, you will hear inflation specifically used to discuss the increase in prices as measured by the consumer price index (CPI) or personal consumption expenditures (PCE). The difference may seem technical, but this definitional shift has changed the entire way we view monetary policy, economic inequality, and financial stability.

Over the course of the twentieth century, the monetary definition favored by economists such as Mises and Hazlitt was gradually replaced by a price-based definition. In a 2012 paper, monetary economist Claudio Borio argued that the economics profession had forgotten lessons of the past and had neglected the financial drivers of business cycles, particularly the roles of credit creation and asset prices.

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