The simplest explanation I ever heard for inflation and deflation is as follows:
Inflation: Too much money chasing too few goods. (Everybody has money so they compete for the available goods and rapidly drive up the price.)
Defalation: Too little money chasing too many goods. (Hardly anyone has any money, so no one is competing for the available goods so the price drops.)
Yes you are correct. And a bigger supply of money (inflated money supply) permits / supports greater levels of money velocity.
Hyper-inflation really has to do with how rapidly the costs of goods are rising and how fast the printing press is running to support the ever-increasing demand for money. If people demand more money to buy things today, because prices are rising, then the loans have to get larger in sum and/or people spend larger quantities of money to bid up prices and spend their money. This places more demand/desire for the need for money so you can spend it. This would naturally drive interest rates up – but if the Federal Reserve prints more money then the interest rates will remain low. The rising prices would turn into a death spiral. However, If the printing press was turned off then interest rates would rise and greater sums of money would be more difficult to obtain. it will immedately arrest further inflation. You would not get hyper-inflation. Once people realize prices aren’t going up anymore and that the money is again a store of value they won’t feel the urgency to spend their money.
Hyper-inflation like that of Weimar Germany after WWI or Argentina is basically just running the printing press until the money death spiral continues until you need trillions of dollars to buy bread. Until it is basically worthless.
Note however, if the money supply is not inflating / expanding that if the price of one or two items go up due to a shortage then this really isn’t inflation. For example. Say if we start to run out of Oil and the price of gasoline goes to $10/gallon. Yes gas will be expensive and so will other things like groceries – that rely on trucks to transport it. If the money supply is not inflatied then people won’t have more money to spend on both gasoline and groceries and other things. If people want to buy shoes they will have to conserve the amount of gasoline they buy to save their money for shoes. If fewer people buy shoes because they have to buy gasoline instead, then the price of shoes may become depressed while gasoline and food remain expensive. Overall the economy does not see a general price rise. Prices only rise in those areas related to Oil. Shoe factories will see no profits in shoes, reduce their production and/or instead retool to make something in greater demand like electric cars. When electric cars are created to compete with oil the demand and price for oil will come down again, and so will the price of groceries. However, say the money supply was expanded when the price of oil went up (due to shortage). Then people would have access to more money (credit) to buy both the gasoline and the shoes. The price of shoes would not fall as in the first scenario – no need to re-tool the shoe factory. People would conserve less and continue to have the ability and demand for oil. Fewer people will be attempting to make electric cars. This would be a general price rise/inflation because of expanding money supply.
Therefore, overall price inflation is not strictly due to a shortage of a good or supply/demand. But rather it is a result of more money chasing the same number of goods. When the created money is used to make a factory and produce it is the net overall increase in money compared to the availability of all the goods that cause prices to rise.
Then there’s always Stagflation: http://en.wikipedia.org/wiki/Stagflation
Your problem is that you assume as money supply increase, or prices increase, that supply is steady or the same. Clearly, fewer people will purchase goods, but as fewer people are buying goods, more and more people are getting laid off. 500,000 new and unemployed individuals in January alone. As millions are laid off, supply will DROP. Companies are going out of business, downsizing and producing less.
As oil is a major input in the economy. How increase in oil price prices is affecting inflation? Why USA economy is deteriorating gradually? what are the facts behind the economical and political stability?