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(MISES) – Price inflation and the resulting business cycles are monetary phenomena, and without increases in the money supply – i.e., monetary inflation – there is no price inflation. If the world were a very simple place, we would see this relationship clearly displayed: when the money supply increased, we would also see a general increase in prices soon thereafter. The world, however, is not a very simple place and an economy can include countless factors that can mask, delay, and otherwise obscure the connection between monetary inflation and price inflation.
For example, monetary policymakers in the U.S. have long benefited from the disinflationary effects of global trade and increasing worker productivity. This means that, for decades, consumers should have seen prices of most goods and services falling. Instead, relentless monetary inflation over the past three decades has resulted in positive price growth that is seemingly mild, and policymakers can claim victory over inflation. Moreover, new money can enter the economy in a variety of ways, often manifesting as asset-price inflation rather than as noticeably high price increases in food or household goods.
Governments also have many tools at their disposal to delay or hide the effects of monetary inflation, sometimes for many years. Price controls and subsidies, for example, can obscure the true costs of goods and services for the end consumer. These tactics cause shortages, bubbles, and other problems, but these can often be blamed on "greed" or "capitalism."
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