How Zimbabwe should measure inflation

This is tragic, in a side-splitting sort of way:

Zimbabwe’s latest inflation figures had been delayed because there were not enough goods in the shops to measure price increases, the state statistical department said yesterday.

It’s instructive for various reasons. The most obvious is that price controls, which Zimbabwe imposed to curb consumer price inflation, cause shortages. Eventually, those shortages become critical, as they have done now. Pity it’s the Zimbabwean people who pay the price for their government’s failure to grasp Economics 101, but it’s hardly surprising.

The other point to make is that the consumer price index that is usually held up as a measure of inflation is, in fact, nothing of the sort. It measures a possible effect of inflation, perhaps, but it does not measure inflation itself. Inflation is not a general increase in price levels. Inflation is an increase in money supply.

For an illustration, consider this chart, which measures US money supply against the value of the US dollar:

As the value of a dollar decreases, consumer prices will, of course, tend to increase too, but that increase is not in itself inflation. An Austrian School monetarist, Frank Shostak, has this to say by way of defining inflation:

The subject matter of inflation is the debasement of money. For instance, historically inflation originated when a ruler would force the citizens to give him all the gold coins under the pretext that a new gold coin was going to replace the old one. In the process, the king would falsify the content of the gold coins by mixing it with some other metal and return to the citizens diluted gold coins. On account of the dilution of the gold coins, the ruler could now mint a greater amount of coins for his own use. (He could now divert real resources to himself). In short, what was now passing as a pure gold coin was in fact a diluted gold coin. The expansion in the diluted coins that masquerade as pure gold coins is what inflation is all about. As a result of inflation, the ruler could engage in an exchange of nothing for something.

Under the gold standard, the technique of abusing the medium of the exchange became much more advanced through the issuance of paper money unbacked by gold. Inflation therefore means here an increase in the amount of paper receipts that are not backed by gold yet masquerade as true representatives of money proper, gold. Again the holder of unbacked money can now engage in an exchange of nothing for something.

In the modern world the money proper is no longer gold but rather paper money hence inflation in this case is purely the increase in the stock of paper money. Please note we don’t say as monetarists are saying (sic) that the increase in the money supply causes inflation. What we are saying is that inflation is the increase in the money supply.

Note that inflationary monetary policy remains, today, a way for governments to “inflate away debt”. But more pertinently for Zimbabwe, this shows that inflation can be measured simply by checking the records of the central bank: how much money did it print last month, as an annualised percentage of money in circulation? That’s inflation.

Measuring inflation does not require shelves full of consumer goods of which prices can be determined. Why would such a measurement be meaningful if prices are capped by government anyway? More pertinently, why would such a measure be meaningful if the shelves are empty in the first place?