I’d like to discuss the various meanings of deflation and inflation. I have seen the usage of these words vary a lot in media and finance. While I have a decent understanding of what is going on, I often get confused by the conflated use of these words and would like to clear some things up.
From my current knowledge, I see inflation as being an increase in broad money supply. For the fiat system, this is best described as an increase in M2. For Bitcoin, it would be described as an increase in supply of bitcoins.
Furthermore, the rate of inflation is just the derivative of broad money supply (basic calculus). For Bitcoin, this is extremely easy to calculate, based on the current halving cycle (i.e. block subsidy), and it sits around 1.75%. For fiat, this is more complicated, nebulous and volatile. As of today, the YoY increase in M2 is about 0.01% due to recent rate hikes, but it was obviously much higher in the past year. Financial institutions try to measure the inflation rate using CPI, but this is blatantly biased and flawed, since inflation effects everyone differently and the “basket of goods” is ever-changing.
On the other hand, deflation is the decrease in broad money supply. I won’t go over the meaning agains, since it is pretty much just the opposite of inflation.
However, I would like to better understand how Bitcoin is deflationary. As Bitcoin eventually reaches its hard cap of 21 million, it will become neither inflationary or deflationary. I’m not sure if there is a technical term for this, but I’ll call it “sound”. In this state of sound money, I understand that the prices of goods will deflate in relation to Bitcoin (as they already have in the past). While this makes sense to me, I believe it is a misnomer to call Bitcoin deflationary. Bitcoin would only be deflating if its supply was decreasing.
Can someone please help me clear up these semantics?
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