Re: Exactly what causes Inflation?

Marc, I am no economist - my background is mathematics and computer
science, although part of my professional function is equity trading. But
in any case, I'll do my best to answer your question. First, I would tend
to doubt that inflation rate can be directly tied to population growth: in
the example of the German economy in the 1920s, for example, astronomical
inflation rates were observed at a time when the German population was at
least stable, if not actually declining. Second, you are correct in your
implication that money supplies in most economies are NOT static - they
can in fact change quite rapidly, and planned changes in money supply are
even one mechanism that some governments use for fine-tuning economies.
However, the degree of the correlation between money supply and inflation
rate is not clear-cut - at times in the recent past, for example, a very
loose money supply policy from the US Government and its agencies has had
little or no observable effect on inflation rates in the US economy. (One
reason for this is what is called "velocity" - the frequency with which a
currency is changing hands in an economy: where money supply is short, the
public can still engage in the kind of frenzied, self-fueling spending that
is often the trigger of rapidly rising prices.) In the end, I guess a short
and simple answer to your question is that inflation results when wages and
prices are not properly tuned to fundamental value of economic enterprise:
if wages are going up and productivity is not, then workers will spend more
freely and products will cost more to produce, driving up prices in two
ways at once. Or put another way, if prices rise without direct reference
to changes in rational valuation of goods and services, then all firms are
forced to pay their workers more to cover those rising costs - which in
turn probably drives up prices still more as producing firms' labor costs
increase. Well, this is a rather complex (and probably inexpert) answer to
a simple question, but I hope it helps!