mining difficulty reduces the mining of new bitcoins and keeps the supply low.
no it doesn't, the difficulty adjustments keep the supply increases regular. That's like bitcoin basics fact no. 2 or thereabouts
The 21 million cap is just a psychological barrier that creates some trust amongst the newbies that the bitcoin price will keep going up,as long as there is increased demand for btc.Inflation would be bad for btc.
Bitcoin's had supply inflation since the first block, and will continue to inflate it's supply until the last block