With a debt based monetary system, it occurs when commercial banks make loans. This is the fractional reserve banking that the central bank system employs. During the loan process, more currency is created "out of thin air".
Thus the money supply inflates.
The result of inflation could be the decline in purchasing power. Many call this inflation when it is actually the result. The common tactic is to look at price increases and presume it is simply due to expansion in the money supply. This is not necessarily the case. When it comes to pricing, there are many variables that enter the equation. For example, supply and demand is an important factor.
Another factor that has to be considered is technology. Over time, this can have the reverse impact upon pricing. As a technology evolves, it tends to get less expensive. Depending upon how much this makes up an economy, that will have an impact upon the overall pricing.
This counter balancing can affect things in ways people do not typically contemplate. Technology requires a lot of funding. Here is where extra money in the economy can get eaten up. Few look at the fields of investing and funding, instead simply focusing upon consumption.
Within a global economy, capital flow is a vital component to the inflation equation, especially for the U.S. Dollar. Since assets denominated in USD tend to be safer than others, when sentiment is leery, it will turn to the U.S. This means that money flows into that country, ultimately increasing the money supply in the domestic banking system.
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