Just to clarify, Mish argues that “money supply” is basically defined as: cash + credit. Inflation is the increase of money supply.
One possible effect of inflation is “price inflation”. But the price of any particular item is affected by many factors. Due to globalization, the price of many products have been kept down. So even though we’ve experienced a lot of inflation over the last decade, we haven’t seen much of its effects in the CPI.
On the other hand, we have seen serious price inflation in other areas. Housing, education, and health care costs are some examples of that. Until recently, it seemed like stock prices were also experiencing price inflation. The DJIA and S&P had sustained P/E ratios that were significantly higher than their historical averages.
Inflation helped to fuel the housing bubble and the housing bubble helped to fuel inflation (via loose lending standards). As housing prices decrease and lending standards tighten, we’re seeing a contraction of credit as well. That results in deflation.
