Perfectly explanatory post!

I would like to add just a little info that helped me a lot to frame out the analytic functioning of inflation/deflation through monetary policy, that is the notion provided by the Quantity theory of money.

It basically relies on a simple mathematical law, that in its exemplified form is known as equation of exchange:


Where

M is the money circulating supply,
V is the velocity of money, or the frequency of transactions in a given period of time(basically how fast money flows),
P is the average price level,
Q is the quantity of transactions of produced goods in a given period of time.

The left-hand member of the equation is the money supply (MS = MxV), while the right-handed one is the money demand (MD = PxQ) and the relation between the two basically states that in an economy all the actors cannot spend more than all the actors produce (gain).

Assuming V and T as constants, (the velocity of circulation of a simple medium of exchange (V) depends on consumers habits, and the quantity of goods (Q) is produced in a situation of full employment -Fisher-), if the monetary policy maker decides to inject money in the system, alias printing new money (increasing the value of M value in the equation), in order to maintain the law (equation), prices must necessarily increase proportionally (Increasing the P value in the equation).

This increase of P is what we call inflation.

If instead of increasing M, we decrease it (destroy money), in order to keep the law valid prices (P) must decrease as well, proportionally. That is what we call deflation.

This model gives an analytic reason on why abundance of money leads to inflation, while scarcity leads to deflation, and why Bitcoin tends to gain purchasing power (facing decreasing supply over time, thus decreasing purchasing price levels for goods, that is to say higher value for itself), while FIATs tends to loose it (facing increasing supply, thus increasing price levels for goods, or lower value for itself).