user-1: I see people everywhere saying that bitcoins are immune to inflation but nobody has explained it adequately to me. I understand why bitcoins would be more or less immune to inflation cause in increased money supply - because there's a fixed money supply forever. But what about hyper-inflation caused by confidence crisis?
Any currency have worth if people are willing to accept it. And how much would a bitcoin be worth is exactly how much goods would people accept to trade for one unit of bitcoin. If for any reason people start to think that bitcoins are worthless, its buying power will diminish and you will have inflation! I don't see how this can be avoided.
Is there something I'm not seeing? Where's the catch? Why are bitcoins  immune to inflation?

user1429: Yes, bitcoin won't be immune to inflation at M2 level, just like Chinese RMB, its M0 is only 5.5 trillion, but its M2 is 97.5 trillion. If only BitCoin-denominated bonds issued by bitcoin       banking facilities.

user492: Suppose people raise bitcoin prices they're charging for goods and services.  They'll be asking for more bitcoins than their customers have, because the supply of bitcoins is limited.  Rather than people generally paying more for stuff, they'll just buy less stuff at higher prices, or pay for it with other currencies since they just don't have the bitcoins.  If they ask their employers who pay them in bitcoins for higher pay in bitcoins, the employers just won't have enough bitcoins either, so their employees will leave them for lack of pay unless they get paid in other currencies.
In "inflation" as I usually think of it, the merchants get the higher prices they're asking for and the employees get the higher wages they're asking for.  With general price increases in bitcoins, that couldn't happen because the bitcoins needed to pay those amounts wouldn't exist.  Is that "inflation"?

user3441: The term “inflation” without the adjective “monetary” is generally accepted by the public to mean a decrease in purchasing power, so it is generally applicable to any market condition which can lower the purchasing power.
The single-word for monetary inflation is “debasement”. Bitcoin's debasement is preset to decline geometrically to asymptotic maximum of 21 million coins.
So Bitcoin has both potential for general inflation forever, and also monetary inflation is assured for some time.
It is quite naive to claim that Bitcoin isn't subject to inflation. An  (eventually) non-debased currency is not superior long-term. Many gold bugs have this irrational delusion (I used to too) which does not fit the unarguable facts of economics and history (you will need to click down the link hierarchy to get all the facts, it is not reasonable to copy all that into this answer).
Btw, until 2033 the biggest threat ahead is not inflation, rather it is confiscation of wealth a.k.a. capital controls and nearly certain world war due to the repeating 78 year boom&bust cycle of technological unemployment (prior 26 year bust was 1929 - 1955).

user3528: The Money supply with Bitcoin is designed to increase in value.  Effectively the money supply grows by allowing the prices of goods and services to fall to fit the amount of Bitcoin required.
Yes this encourages saving.  But saving increases the value of Bitcoin, making prices fall further, until prices are so low people are willing to spend their savings/wages.  People are also (at some point) willing to take lower wages, because in effect those wages are more valuable. 
Eventually, people are comfortable with their savings, and they invest their savings, and spend their savings.  Loans from banks are less necessary, because the wealth of people in general has increased.
Bitcoin is designed for this process by being easily divisible to 8 decimal places.  You can literally give someone .00000001 of a Bitcoin.  For the foreseeable future, Bitcoin can expand in value to meet the needs of any Economy.

user659: This paragraph from Wikipedia explains the confusion:

The term "inflation" originally referred to increases in the amount of
  money in circulation, and some economists still use the word in this
  way. However, most economists today use the term "inflation" to refer
  to a rise in the price level. An increase in the money supply may be
  called monetary inflation, to distinguish it from rising prices, which
  may also for clarity be called 'price inflation'. Economists
  generally agree that in the long run, inflation is caused by increases
  in the money supply.

When people say that Bitcoin is immune to inflation, they are referring to monetary inflation since there will never be more than 21 million bitcoins.

user22: Specifically, bitcoins are immune to M0/MB inflation, meaning that the money supply itself does not inflate, except at the very beginning (which we're still in) while the original 21 million BTC get distributed via the mining process. Once 21 million coins exist, they become deflationary since no new coins are issued and, as naturally occurs, money falls out of circulation as wallets are lost.
Bitcoin could still suffer the kinds of inflation most currencies see in M1/M2/M3/MZM such as fractional-reserve banking, but the idea of a publicly published block chain is that at any moment it should be trivial to audit a bank and ensure their deposits are correctly recorded. Essentially, any institution practicing fractional reserve banking should be much easier to spot and those who dislike such practices can more easily walk away from them. There are complications to this model, but that's the ideal anyway.

-1: <p>I see people everywhere saying that bitcoins are immune to inflation but nobody has explained it adequately to me. I understand why bitcoins would be more or less immune to inflation cause in increased money supply - because there's a fixed money supply forever. But what about hyper-inflation caused by confidence crisis?</p>

<p>Any currency have worth if people are willing to accept it. And how much would a bitcoin be worth is exactly how much goods would people accept to trade for one unit of bitcoin. If for any reason people start to think that bitcoins are worthless, its buying power will diminish and you will have inflation! I don't see how this can be avoided.</p>

<p>Is there something I'm not seeing? Where's the catch? Why are bitcoins  immune to inflation?</p>
 1429: <p>Yes, bitcoin won't be immune to inflation at M2 level, just like Chinese RMB, its M0 is only 5.5 trillion, but its M2 is 97.5 trillion. If only BitCoin-denominated bonds issued by bitcoin       banking facilities.</p>
 492: <p>Suppose people raise bitcoin prices they're charging for goods and services.  They'll be asking for more bitcoins than their customers have, because the supply of bitcoins is limited.  Rather than people generally paying more for stuff, they'll just buy less stuff at higher prices, or pay for it with other currencies since they just don't have the bitcoins.  If they ask their employers who pay them in bitcoins for higher pay in bitcoins, the employers just won't have enough bitcoins either, so their employees will leave them for lack of pay unless they get paid in other currencies.</p>

<p>In "inflation" as I usually think of it, the merchants get the higher prices they're asking for and the employees get the higher wages they're asking for.  With general price increases in bitcoins, that couldn't happen because the bitcoins needed to pay those amounts wouldn't exist.  Is that "inflation"?</p>
 3441: <p>The term “inflation” without the adjective “monetary” is generally accepted by the public to mean a decrease in purchasing power, so it is generally applicable to any market condition which can lower the purchasing power.</p>

<p>The single-word for monetary inflation is “debasement”. Bitcoin's debasement is preset to decline geometrically to asymptotic maximum of 21 million coins.</p>

<p>So Bitcoin has both potential for general inflation forever, and also monetary inflation is assured for some time.</p>

<p>It is quite naive to claim that Bitcoin isn't <a href="https://bitcoin.stackexchange.com/questions/1163/how-can-determine-the-fundamental-theoretical-value-of-the-bitcoin-based-on-stea/8641#8641">subject to inflation</a>. An  (eventually) non-debased currency is <a href="https://bitcoin.stackexchange.com/questions/408/does-hoarding-really-hurt-bitcoin/8533#8533">not superior long-term</a>. Many gold bugs have this irrational delusion (I used to too) which <a href="https://bitcoin.stackexchange.com/questions/1895/what-bitcoin-esque-alternatives-are-there/8627#8627">does not fit the unarguable facts of economics and history</a> (you will need to click down the link hierarchy to get all the facts, it is not reasonable to copy all that into this answer).</p>

<p>Btw, <a href="http://copute.com/edu/Intro%20to%20Computers.html#Why_Learn_Programming" rel="nofollow noreferrer">until 2033</a> the biggest threat ahead <a href="http://armstrongeconomics.com/2013/03/14/big-brother-his-whole-family-have-arrived/" rel="nofollow noreferrer"><strong>is not inflation</strong></a>, rather it is confiscation of wealth a.k.a. capital controls and nearly certain world war due to the repeating 78 year boom&amp;bust cycle of technological unemployment (prior 26 year bust was 1929 - 1955).</p>
 3528: <p>The Money supply with Bitcoin is designed to increase in value.  Effectively the money supply grows by allowing the prices of goods and services to fall to fit the amount of Bitcoin required.</p>

<p>Yes this encourages saving.  But saving increases the value of Bitcoin, making prices fall further, until prices are so low people are willing to spend their savings/wages.  People are also (at some point) willing to take lower wages, because in effect those wages are more valuable. </p>

<p>Eventually, people are comfortable with their savings, and they invest their savings, and spend their savings.  Loans from banks are less necessary, because the wealth of people in general has increased.</p>

<p>Bitcoin is designed for this process by being easily divisible to 8 decimal places.  You can literally give someone .00000001 of a Bitcoin.  For the foreseeable future, Bitcoin can expand in value to meet the needs of any Economy.</p>
 659: <p><a href="http://en.wikipedia.org/wiki/Inflation#Related_definitions" rel="nofollow noreferrer">This paragraph from Wikipedia</a> explains the confusion:</p>

<blockquote>
  <p>The term "inflation" originally referred to increases in the amount of
  money in circulation, and some economists still use the word in this
  way. However, most economists today use the term "inflation" to refer
  to a rise in the price level. An increase in the money supply may be
  called monetary inflation, to distinguish it from rising prices, which
  may also for clarity be called 'price inflation'. Economists
  generally agree that in the long run, inflation is caused by increases
  in the money supply.</p>
</blockquote>

<p>When people say that Bitcoin is immune to inflation, they are referring to monetary inflation since <a href="https://bitcoin.stackexchange.com/q/104">there will never be more than 21 million bitcoins</a>.</p>
 22: <p>Specifically, bitcoins are immune to M0/MB inflation, meaning that the money supply itself does not inflate, except at the very beginning (which we're still in) while the original 21 million BTC get distributed via the mining process. Once 21 million coins exist, they become deflationary since no new coins are issued and, as naturally occurs, money falls out of circulation as wallets are lost.</p>

<p>Bitcoin could still suffer the kinds of inflation most currencies see in M1/M2/M3/MZM such as fractional-reserve banking, but the idea of a publicly published block chain is that at any moment it should be trivial to audit a bank and ensure their deposits are correctly recorded. Essentially, any institution practicing fractional reserve banking should be much easier to spot and those who dislike such practices can more easily walk away from them. There are complications to this model, but that's the ideal anyway.</p>
