Thursday, August 16, 2007

The Meaning of Inflation

Here we have a decent little article on the debate over the humble penny. The cost of producing our 1 cent piece is hovering around 2 cents, which despite lacking any real significance as a fact has prompted some to suggest we discontinue it. The idea of eliminating the penny in turn has raised this fear:
Weller, who has long lobbied for the penny with a group called Americans for Common Cents, argues the penny is good for the economy. Its absence, he said, would lead retailers to raise prices, influencing inflation.
Ugh. The implicit idea, which I've heard voiced elsewhere as well in similar discussions, is that retailers would simply round ever transaction up to a multiple of 5 cents, were the penny to be unavailable for making change. First of all I find this rather unlikely relative to the obvious alternative of rounding transactions to the nearest 5 cents, which assuming the last digit follows a uniform distribution will, on average, not alter final prices at all. But much more importantly, even if every transaction were rounded up, this would not influence inflation in the slightest. The reason is that inflation is one of those sneaky words like "liberal" that has been stealth-redefined during the 20th century. When we talk today of "inflation" we are speaking of a rise in the general level of prices, or in the level of prices in some sector. Milton Friedman is famous for stating that inflation is everywhere and always a monetary phenomenon, and in doing so he inadvertently pointed out the original meaning of the word, which is an increase in the money supply. It is very telling that in the modern age all sorts of explanations for and t theories of "inflation" have been put forth, while the truth lie all along in the original form of its very definition.

Point being, there is no possible way that rounding prices up one to four cents could influence inflation, because inflation has nothing to do with prices.

Of course the real prime mover for this preposterous claim is not ignorance but avarice. As is noted in the article, the above quoted individual is a lobbyist for a firm that sells zinc to The Mint for penny production. As we say on the internet, shock level zero.

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