Welcome to Econ Talk, part of the Library of Economics and Liberty. I'm your host Russ Roberts

of George Mason University and Stanford University's Hoover Institution. Our website is econtalk.org

where you can subscribe, find other episodes, comment on this podcast, and find links to

another information related to today's conversation. Our email address is mailadicontalk.org. We'd

love to hear from you. Today is January 10th, 2011, and my guest is Don Boudreau of George

Mason University. Our topic for today is inflation and deflation. Don, welcome back to Econ Talk.

Always good to be here Russ. So first let's talk about what is, when we talk about inflation,

what is usually meant and what do we mean as economists? You asked the right question to begin.

The definition of inflation and deflation, those definitions have changed over time and have

changed in ways that are significant. The original meaning of inflation was an increase in the

money supply. There are still a few people today who hold out for that definition, and much more

of a spontaneous order guy when it comes to language words mean what people take them to mean. In fact,

inflation today means, to the average person, here's an entity typical, even very well-informed,

professional economist, who uses it. It means not an increase in the money supply, it means a sustained

increase in the general price level, a sustained increase in average prices. But the

it's important to remember what inflation originally meant because there's a connection, of course,

between changes in the money supply and changes in the price level, and similarly with deflation,

deflation originally meant a decrease in the supply of circulating media, and now it means

a general decrease in the price level. Let's start with one of the common confusions.

Of course, much of the confusion I think that there is about these two topics of inflation

and deflation. It's really one topic. The average level of prices and their movements.

One of the sources of confusion is how the media writes about it, and I want to talk about two issues.

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