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From an Austrian Perspective
Inflation, from an Austrian perspective, is primarily defined as an increase in the money supply, which dilutes the value of existing currency and leads to rising prices.
Austrians argue that central banks, through fiat money creation and fractional reserve banking, artificially expand credit, causing malinvestments and economic bubbles.
This school views inflation as a hidden tax that disproportionately harms savers and fixed-income earners by eroding purchasing power over time.
According to Austrians like Ludwig von Mises, inflation distorts market signals, leading to unsustainable booms followed by inevitable busts in the business cycle.
They advocate for a return to sound money, such as a gold standard, to prevent arbitrary money printing by governments.
From a Keynesian Perspective
In contrast, Keynesians define inflation more broadly as a sustained rise in the general price level, often measured by indices like the CPI.
John Maynard Keynes and his followers see demand-pull inflation occurring when aggregate demand exceeds supply, stimulating economic growth but risking overheating.
Cost-push inflation, in the Keynesian view, arises from increases in production costs, such as wages or raw materials, which firms pass on to consumers.
Keynesians believe moderate inflation is beneficial, as it encourages spending and investment rather than hoarding money during deflationary periods.
They support active monetary policy by central banks, like adjusting interest rates, to manage inflation and maintain full employment.
Austrian vs. Keynesian
Austrians criticize Keynesian policies for perpetuating inflation through deficit spending and easy money, which they say leads to chronic economic instability.
Keynesians counter that without intervention, markets can fall into liquidity traps, where deflation spirals and unemployment rises unchecked.
From an Austrian lens, hyperinflation examples like Weimar Germany illustrate the dangers of unchecked money supply growth.
Keynesians point to post-WWII economic booms as evidence that controlled inflation supports prosperity and reduces debt burdens.
Ultimately, while Austrians emphasize individual liberty and free markets to combat inflation, Keynesians prioritize government and central bank roles in stabilizing the economy against inflationary pressures.
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