“Definitions of ‘inflation’ can vary in depth and complexity but what cannot be gotten around is that the MEASURE of ‘inflation’ is % increase in prices.”
Ever wonder why such a measure is so popular? It gives us solid ground for argument, yes. Just like the commonly used and totally fictitious unemployment figures, for that matter. Mostly, it’s because such numbers are convenient to politicians and the economists who enable them. If we never talk about the unseen, we never have to measure the numbers against them.
That way, we can inflate so long as prices go down, even though we’re setting prices higher than they otherwise would be. Likewise, so long as the rate of growth in unemployment goes grows slower, we can do whatever we want to raise employment, even though we have no idea where unemployment would optimally be in a relatively free market. “Price inflation” and “the rate of unemployment” are figures politicians hide behind like, say Phil Jackson might hide behind his career winning percentage. Let’s say he doesn’t retire and the Lakers go on a historic skid. You’d have him say, “Look, I’m still head and shoulders above the average coach in NBA history.” Would that in any way excuse the Lakers’ losing streak? No.
I guess what I’m saying is that inflation is inflation, and unemployment is unemployment. We can call whatever we want, and whatever’s convenient for us, “inflation” or “unemployment.” But everybody knows, on some level, that our numbers are BS.
Prices provide information to the economic system and about it. Economists have long tried to come up with a means of aggregating them into indexes. Politicians have nothing to do with this barely understanding what they are and being utterly ignorant of how they are created.
Their accuracy and comprehensiveness has been disputed for decades but I think it is hard to argument that they don’t at least measure direction of change. We can argue that the 9% unemployment rate should be 15.6% but we cannot argue that having it go from 9 to 10% is not good. Or that the 3% rate of inflation should be 10% but again it going from 3 to 5% is not good.
No one cares if the money supply increases from 10 trillion to 100 trillion but everyone cares if prices increase from 3% to 10%. This is why price increases are inflation and money supply increases are only money supply increases. You cannot “inflate as prices go down” you only increase the money supply.
Friedman frequently discussed the concept of a “Natural Rate of Unemployment” and “natural rate of interest” so it has been a subject of some interest in the field of economics.
Economics is primary a study of what is or has been rather than what Could be or could have been although there maybe some who have looked into the issue of the measuring of potential or the unseen to which you reference. “Shadow” prices maybe one of those subjects and have received some attention. I am not up on this branch of economic literature.