Monetary inflation is a situation in which a nation experiences an increase in the money supply available. At one time, the term inflation was considered to be synonymous with monetary inflation. In some nations around the world, this is still the case. Economists in other nations tend to draw a distinction between money inflation and inflation, identifying the latter as related to price inflation.
The sustained increase in money supply in a nation’s monetary base is generally considered to be a reaction to upcoming economic conditions that will affect the balance between supply and demand. This in turn will have an effect on the buying habits of consumers and ultimately have an impact on the economy within a given nation or group of nations. When monetary inflation takes place, the most common result is price inflation, a phenomenon in which the producers of goods and services tend to increase prices.
The use of monetary inflation is often associated with attempts by a government to balance an economy that is already experiencing turmoil due to events unanticipated by economists. The strategy can also be utilized to offset a projected series of events that is likely to have some type of effect on the spending habits of consumers. The idea is to control the rate of monetary inflation so that price inflation in turn is also controlled, creating a situation in which consumers are continuing to purchase goods and services at acceptable levels and minimizing the chances for some type of long-term financial crisis within the nation. From this perspective, monetary inflation that is properly managed by a central bank has the effect of evening out the economy and minimizing the potential for a sizable number of consumers being unable to purchase the goods and services they desire.
Since there are a number of different opinions on exactly how the supply and demand of money relates to the prices charged for various goods and services, there are those that believe measured monetary inflation on the part of central banks is either ineffectual or possibly detrimental. Those who oppose the use of this type of financial tool tend to favor the elimination of a central banking system, and the restoration of a full gold standard. Theories on which approach is ultimately in the best interest of a national or even the global economy continue to be debated among financial professionals, and will likely continue for many years to come.
