At http://www.federalreserve.gov/kids/#inflation, the Fed explains what inflation is:
"9. What is inflation?
Inflation means that the general level of prices of goods and services is increasing. When inflation is rapid, the prices of goods and services can increase faster than consumers’ income, and that means the amount of goods and services consumers are able to purchase goes down. In other words, the purchasing power of money has declined. With inflation, a dollar buys less and less over time."

What's wrong with the Fed's definition? Inflationdata.com's "What is the Real Definition of Inflation?" article suggests that the Fed's definition is nothing short of backwards! The following is an excerpt.

Quote:
Webster's 1983 Definition of Inflation.

According to Webster's New Universal Unabridged Dictionary published in 1983 the second definition of "inflation" after "the act of inflating or the condition of being inflated" is:

"An increase in the amount of currency in circulation, resulting in a relatively sharp and sudden fall in its value and rise in prices: it may be caused by an increase in the volume of paper money issued or of gold mined, or a relative increase in expenditures as when the supply of goods fails to meet the demand.

This definition includes some of the basic economics of inflation and would seem to indicate that inflation is not defined as the increase in prices but as the increase in the supply of money that causes the increase in prices i.e. inflation is a cause rather than an effect.

Webster's 2000 Definition of Inflation.

However, The American Heritage® Dictionary of the English Language, Fourth Edition, Copyright © 2000 Published by Houghton Mifflin Company says:

Inflation:
2) A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.

In this definition, inflation would appear to be the consequence or result (rising prices) rather than the cause.


So, there you have it. In less than one generation, the definition of inflation has changed. Is it any wonder now that when the Federal Reserve tells us (and now middle schoolers!) that it is keeping an eye on inflation by watching prices, hardly any of us retail investors question whether this is appropriate. Is it any wonder that hardly any of us retail investors question why the Federal Reserve isn't looking at its monetary policies and the Federal Government's fiscal policies for sources of inflation?

I think your over-analyzing the Fed's definition of inflation. Keep in mind the intended audience. They don't mention (well, they take a sideways angle for) a cause and effect relationship, they're just describing an observation.

I agree that the Fed should have at least mentioned the money supply's effect on inflation. Supply and demand would be a good concept for middle schoolers to learn.

I took the Kids Quiz and actually got one of those questions wrong. Whoops!