With bitcoin, we finally have a currency where the money supply can shrink.
Please explain to me how supply of bitcoin can shrink. At some point in the future there can be less than 21 million bitcoins mined that today? How?
Supply of bitcoin is ever-growing and it will be until the very last one is mined. But that's not inflation, that's just supply.
Thing you can see on the markets with one bitcoin being worth more and more compared to fiat currencies, that is deflation of bitcoin. And deflation is good thing for all basically parties involved as long as economy of some nation (or world) doesn't depend on currency that is deflation. Bitcoin is long way from that point.
The supply of btc halves every few years, that's how. Also to the other question a lot of bitcoins where lost already. If you delete your wallet without any sort of backup they are gone. There was even a case in 2011 of an exchange that rebooted the amazon cloud and lost all the btc in their wallet. Gox took over that exchange and refunded all the btc lost from their profits. There will never be 21 million bitcoins.