The Definition of Inflation: Examining the Fed’s Decision to Raise Rates
Bankers know that history is inflationary and that money is the last thing a wise man will hoard.
William J. Durant
Updated Jan 28, 2026
What Inflation Really Means
Inflation gets thrown around constantly in financial circles, yet surprisingly few people truly understand what the term actually means. At its most fundamental level, inflation refers to a general increase in prices over time. Various factors can trigger this phenomenon: an expanding money supply, shrinking availability of goods and services, or shifts in how consumers behave and spend.
Here’s the thing most people miss: inflation isn’t inherently good or bad. Context matters enormously. A moderate level of inflation can actually signal a healthy economy, indicating robust consumer demand and businesses confident enough to raise prices without losing customers. But when inflation spirals too high, the consequences become genuinely damaging—reduced consumer spending, businesses pulling back on investment, and a cascade of negative economic effects that can take years to unwind.
The Fed’s Real Endgame
A significant debate has raged among economists and financial experts about inflation’s true nature. While the Federal Reserve has worked hard to frame inflation as a major concern, proponents of the hard money camp argue the real issue lies elsewhere entirely—in the relentless expansion of the money supply.
The Fed’s definition of inflation, which fixates on price increases, completely sidesteps the root cause. In reality, inflation should be understood as an increase in the money supply itself. Rising prices? Those are merely symptoms of this underlying condition.
By refusing to address the money supply issue directly, the Fed may actually be making the inflation problem worse rather than solving it. Many experts argue that policymakers should focus on limiting money supply growth and encouraging responsible monetary policies instead of the current approach.
This article from mises.org captures the concept brilliantly:
Inflation, therefore, means an increase in the amount of receipts for gold on account of receipts that are not backed by gold yet masquerade as the true representatives of money proper, gold.
The holder of un-backed receipts can now engage in an exchange of nothing for something. As a result of the increase in the amount of receipts (inflation of receipts) we now also have a general increase in prices.
The Fed’s Rate Hike Decision
The Federal Reserve’s decision to raise interest rates sparked intense debate, with some economists warning it could inflict serious damage on the economy. One primary concern? The economic recovery has been fueled largely by “hot money,” and hiking rates risks upsetting this delicate balance.
Despite these warnings, the Fed pushed forward with its hawkish stance, raising rates multiple times. However, comments from former Fed Chair Janet Yellen suggested the central bank’s attitude might shift. Yellen acknowledged that inflation levels remained below the Fed’s 2% target, hinting the bank might tolerate some inflationary pressure to support economic growth.
As she has in other statements recently, Yellen told lawmakers that she expects low inflation to be transitory. “Temporary factors appear to be at work. It’s premature to reach the judgment that we’re not on the path to 2% inflation over the next couple of years,” Yellen said. “As we indicate in our statement, it’s something we’re watching very closely, considering risks around the inflation outlook.” Full Story
Based on the factors outlined below, Yellen might have to wait considerably longer before inflation hits that 2% target. Just look at Japan—they’ve struggled to generate inflationary forces for decades. Despite injecting billions into the economy hoping for change, inflation remains stubbornly low. The uncomfortable truth? Our economic recovery isn’t real. Remove the easy money supply, and the whole thing collapses.
Bill Gross Sounds the Alarm
Gross said most destructive leverage occurs at the short end of the yield curve as the cost of monthly interest payments increases significantly to debt holders. “While governments and the U.S. Treasury can afford the additional expense, levered corporations and individuals in many cases cannot,” he said.
Since the Great Recession, more highly levered corporations, and in many cases, indebted individuals with floating-rate student loans now exceeding $1 trillion, cannot cover the increased expense, resulting in reduced investment, consumption and ultimate default, Gross said. “Commonsensically, a more highly levered economy is more growth sensitive to using short-term interest rates and a flat yield curve, which historically has coincided with the onset of a recession,” he said. Yahoo
Here’s a telling observation: if inflation were genuinely a problem, central bankers worldwide would be raising rates. Instead, many have been doing the exact opposite.
The Bank of Japan’s Reality Check
The BOJ made it clear they had no intention of raising rates anytime soon. The Bank of Japan’s policy meeting ended Thursday with no change to its injections of trillions of yen (hundreds of billions of dollars) into the economy each year through government bond purchases. The BOJ said that it forecasts inflation at 1.1 per cent in 2017, below its 2 per cent target and its earlier outlook for a 1.4 per cent rise in the consumer price index. But while central banks in Europe and the U.S. began winding back stimulus measures taken to counter the fallout from the global financial crisis, Kuroda stated the BOJ would persist until achieving its inflation target—now not expected until 2019. Full story
South Africa’s Central Bank Surprised Markets with a Rate Cut
The South African Reserve Bank surprised markets with an interest rate cut on Thursday. While most economists have been expecting the bank to move towards a cut, it was not expected to come quite so soon. The Bank cut the repo rate to 6.75% from 7%. Full story
Global Inflation Continues Declining
Even though Canada raised rates, the underlying data didn’t support such a move. That July rate increase might prove to be short-lived. They could end up following the Fed’s pattern—step forward, then back away.
May saw an unadjusted CPI increase, but it was well below the Bank of Canada (BoC) target. CPI rose 1.3% year-over-year in May, slipping even further than last month’s 1.6%. Statistics Canada claimed the decline was primarily due to decreased food and energy costs. The BoC targets a rate of 2% for a well-balanced money supply. Full Story
According to FT, inflation in Germany—Europe’s largest economy—fell to 1.4%, a low for 2017:
A surprising tumble in Germany’s closely-watched inflation rate. Annual consumer price growth in the eurozone’s largest economy has fallen to 1.4 per cent from 2 per cent in May—the year’s lowest level.
Brazil’s Inflation Hits Decade Lows
Consumer prices in June decreased by 0.23% over the previous month, contrasting with May’s 0.31% increase. The drop came on the back of falls in several categories across the index, including lower prices for housing, transport, and food and beverages. Inflation continued to drop in June, falling to an over-decade low of 3.0% (May: 3.6%). The result was below the Central Bank’s target range of 4.5% plus/minus 2.0 percentage points and is good news for the battered economy. The sharp fall will allow the Central Bank to continue with its easing cycle to support recovery and should help support household spending. Full Story
Credit Suisse stated that global inflation risks remain low:
Global inflation trends remain quite benign. In most of the major advanced economies, headline inflation peaked in the first quarter once the positive base effects of energy price developments faded. In the major emerging markets, inflation is also mostly in decline, with the recovery of their currencies and still weak domestic demand being the most critical drivers in countries such as Russia and Brazil. Looking ahead, we see a good reason for this benign global environment of relatively low inflation to last for longer.
Why Other Central Banks Aren’t Raising Rates
These countries can’t afford to play with fire. Their currencies aren’t the world’s reserve, so they have limited room to maneuver. They won’t risk triggering a recession when they know this economic recovery is largely an illusion. Remove the cash infusions, and economies worldwide would collapse.
Look at the U.S. retail sector. The entire industry was imploding as players like Amazon pushed prices relentlessly lower. Bloomberg estimated that 8,640 stores would close by year-end. We thought that estimate might be conservative, with the final tally potentially exceeding 9,000.
Extrapolating out to the full year, there could be 8,640 store closings in 2017, Buss said. That would be higher than the 2008 peak of about 6,200. Retail defaults are contributing to the trend. Payless is closing 400 stores as part of a bankruptcy plan announced Tuesday. The mammoth chain had roughly 4,000 locations and 22,000 employees—more than it needed to handle sluggish demand.
The Grocery Wars Intensify
With Amazon’s purchase of Whole Foods and Lidl’s entry into the U.S. market, a massive grocery war erupted. This price war triggered another set of deflationary forces. Lidl stated they would price groceries up to 50% below U.S. rivals.
“This is the right time for us to enter the United States,” Brendan Proctor, chief executive officer for Lidl U.S., told Reuters at a media event in New York late on Tuesday. “We are confident in our model. We adapt quickly, so it’s not about whether a market works for us but really about what we will do to make it work.”
Aldi, the other German discounter that had been operating in the U.S. for years, already offered prices below Wal-Mart’s costs. The upside for consumers? Goods priced lower than Wal-Mart but with far superior quality. Analysts estimated that by 2020, Lidl would have over 300 stores in the U.S. Aldi already had 1,600 stores across more than 35 states and planned to open another 900 within five years. Aldi and Lidl proved to be a formidable duo—they had already sent shockwaves through Britain’s grocery retail market, hurting established players like Tesco Plc and the ASDA Supermarket chain.
Technology Keeps Pushing Prices Down
Artificial Intelligence and technological breakthroughs continue driving prices lower. Consider how much more pricing power consumers have today compared to a decade ago. This trend shows no signs of slowing down.
There’s another crucial factor to consider: the velocity of M2 money stock. This indicator suggests inflation simply isn’t an issue. The velocity of M2 in the U.S. has been plunging for years with no signs of reversing. If inflation were genuinely a problem, M2 velocity would be trending upward, not downward. This deserves deeper examination in future analysis.
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