The Oil Drum

Price changes are simply price changes, and are often the result of underlying changes in the money supply. For instance, if the money supply doubled with nothing else changing, you would expect nominal prices eventually to double as well (keeping prices the same in real terms).

However, nominal prices can fall as the money supply expands, as has been the case with cheap goods from China due to globalization. A larger money supply did not ignite a wage-price spiral as downward pressure was maintained on wages by foreign competition willing to work for less. Cheap labour, cheap energy and foreign competition has meant cheap goods. When prices fall in nominal terms while the money supply expands, then prices are falling very steeply in real terms.

Prices tend to fall in a deflation as the money supply contracts rapidly, but one can envisage circumstances where that would not be the case, or would be the case only temporarily. For instance, the price of oil should fall in nominal terms, at least temporarily, in a deflation, but the resulting disruption could then reduce supply by as much as deflation had reduced demand, or more so. In that case, oil could rise in nominal terms even while the money supply was falling, which would mean oil going through the roof in real terms. This is in fact what I'm expecting to happen over the next few years, in other words except for the terminology I agree with Westexas.