Inflation is the all-encompassing and continued rise taken together level of prices measured by an index of the cost of various goods and services. Recurring price increases erode the purchasing power of money and other financial assets with fixed values, creating grave economic distortions and uncertainty. Inflation results when actual economic pressures and anticipation of future developments cause the demand for goods and services to exceed the supply available at existing prices or when available output is restricted by faltering productivity and marketplace constraints. Sustained price increases were historically directly linked to wars, poor harvests, political upheavals, or other unique events.

When the upward trend of prices is gradual and irregular, averaging only a few percentage points each year, such creeping inflation is not considered a serious threat to economic and social progress. It may even stimulate economic activity: The illusion of personal income growth beyond actual productivity may encourage consumption; housing investment may increase in anticipation of future price appreciation; business investment in plants and equipment may accelerate as prices rise more rapidly than costs; and personal, business, and government borrowers realize that loans will be repaid with money that has potentially less purchasing power.1 A greater apprehension is the rising prototype of constant price rises characterized by much higher price increases, at annual rates of 10 to 30 percent in some industrial nations and even 100 percent or more in a few developing countries. Chronic inflation tends to become permanent and ratchets upward to even higher levels as economic distortions and negative expectations accumulate. To accommodate chronic inflation, normal economic activities are disrupted: consumers buy goods and services to avoid even higher prices; real estate speculation increases; businesses concentrate on short-term investments; incentives to acquire savings, insurance policies, pensions, and long-term bonds are reduced because inflation erodes their future purchasing power; governments rapidly expand spending in anticipation of inflated revenues; and exporting nations suffer competitive trade disadvantages forcing them to turn to protectionism and arbitrary currency controls.

One smart thing an investor should do during the time of inflation is purchase equity in the form of a home. One reason to start here is because you are borrowing money. As long as the rate of borrowing money is less than the inflation rate, which it usually is because interest rates move slower than the inflation, there will be profits in the long run. A mortgage is very safe because the rate remains constant throughout its life, even thought the inflation rates will climb.Some analysts have recommended the use of various income policies to fight inflation. Such policies range from mandatory government guidelines for wages, prices, rents, and interest rates, through tax incentives and disincentives, to simple voluntary standards suggested by the government. Advocates claim that government intervention would supplement basic monetary and fiscal actions, but critics point to the ineffectiveness of past control programs in the United States and other industrial nations and also question the desirability of increasing government control over private economic decisions. Future stabilization policy initiatives will likely concentrate on coordinating monetary and fiscal policies and increasing supply-side efforts to restore productivity and develop new technology.

The relationships between money and output and between money and inflation in economies that have adopted a commodity standard and those that have adopted a fiat one were examined to determine how a shift in monetary standards affects inflation, employment and production. Results revealed that the growth rates of various monetary aggregates are more highly correlated with inflation and with one another under fiat standards than they are under commodity standards. However, neither standard showed higher correlation between money growth and output growth. It might have been expected from the poor fit of regulated-price inflation and money that the fit between freely determined prices and money would have been better than that of overall inflation and money. However, we have shown that the fit between money and overall inflation is superior to that for freely determined prices, or indeed for any component. Assessing the relationships between money, inflation, and output under different monetary standards requires empirical counterparts to the concept of money. We use an eclectic approach. Following conventional studies of money and inflation, we use a broad measure of money that encompasses most objects that circulate as media of exchange or can quickly be converted into such objects.

Because some theories of money suggest that broad measures of money may fail to reveal important relationships between money and inflation, we also employ narrower measures of money. These theories imply that money should be divided into two mutually exclusive categories: objects that represent a convertibility promise by, or claim on, the issuer and objects that represent no convertibility promise or claim. For convenience, we refer to the nonconvertible, unclaimable objects as primary money and the convertible, claimable objects as secondary money. Gold and silver coins (specie) that used to circulate in the United States and Federal Reserve notes that circulate today are examples of primary money: the issuers of this money do not promise to convert it into anything of value. Bank notes that used to circulate in the United States and bank deposits that circulate today are examples of secondary money: the issuers of this money promise to convert it into something else, usually on demand.

Economists have revealed that there exists a direct link between money growth and inflation rates. The stability of price levels is the ultimate goal of effecting monetary policy for sustaining market growth in a global economy. Contrary to popular belief, inflation is not a tool for implementing economic growth rate decline. Neither is it reduced by lower real growth or by means of a recession.

Monetary growth can be sustained in terms of real output growth by increasing labor supply and capital. Since both money growth and output growth are higher under fiat standards, one might conclude that there is a positive long-ran relationship between money growth and output growth. Drawing such a conclusion is unwarranted, however. It confuses evidence from when countries switch to a different monetary standard with evidence from when countries operate under a given monetary standard. The evidence from the average levels of money growth and output growth of countries under commodity standards and countries under fiat standards only suggests a relationship between a country's level of output growth and its being on a given standard. The evidence does not suggest that if a country is already on a fiat standard, for example, increasing the rate of money growth will increase its rate of output growth.

The growth rates of various monetary aggregates are more highly correlated with inflation and with each other than they are under commodity standards. In contrast, we do not find that money growth is more highly correlated with output growth under one standard than under the other. We also find that under fiat standards, rates of money growth, inflation, and output growth are all higher than they are under commodity standards.