I think it's the reverse--if the value of, say, fiat decreases the price of good goes up.  I'm thinking of hyperinflation situations in particular, where the price of stuff can go up crazy amounts.  You've seen those wheel barrels with Zimbabwe dollars in them, right?  Well yesterday it cost 100 dollars to buy X, whereas today it costs 10,000 dollars for X.  The value of the money went down quite a bit, and as a result the price of X is high.

The example of buying a flat I think is correct--if the flat was valued in bitcoin only.

As far as volatility being an impediment to bitcoin being a currency, I agree with that as well.  When it's going up, that encourages hoarding of it, and when it goes down you can't spend it fast enough.  You can still use it as money, of course, but the volatility is definitely a negative attribute as far as that's concerned.  But that also makes it great for trading.