If increasing the money supply is "free", then why not just increase it a whole bunch this year and end poverty?
I think the view you express implicitly puts too much trust in policymakers and assumes the system under study to be more stable than we really have evidence to believe it is. Incidentally it is precisely those two characteristics that led to the crash a few years ago.
In simple terms though, as the money supply increases, the value of the currency decreases, causing prices to rise (inflation) - but there are too many other factors to count that affect prices and its not always as simple as supply goes up -> prices go up.
Where I think there may some disagreement is around how prices are recorded and tracked - the methodology behind the calculation of whichever price index is being referenced. The number used to determine real inflation excludes the prices of fuel (oil) and food since both numbers depend heavily on speculation and a number of other factors outside of "inflation".
Austrian economists conflate increases in the money supply and price inflation, but it's not necessarily true. In fact, mainstream New Keynesians (that includes conservatives like Greg Mankiw) have predicted for years that increasing the Fed's balance sheet wouldn't increase inflation. They have been right.
The US enjoys this position largely b/c of its size but also b/c of the frequent policymaking folly that occurs in other nations.
The only thing that can impose true discipline on this process is the existence of competition.... it's the only thing that could decrease demand for US Treasury bills.
It's obvious that we're not currently experiencing hyper-inflation, but the configuration of the world that will allow the trend to continue becomes less certain the further things get extended.
Imagine someone issues you a credit card with a $1 per month minimum payment. As long as you can keep getting the limit increased you'll surely be able to make the payment each month, no matter what other spending you do. The US is able to keep borrowing and borrowing, and its creditors are very lenient b/c they lack a better option.
[1] There was a few payment in the 1970s that was slightly late due to a clerical error, but that hardly counts.
That shouldn't even be an open question anymore. Concern about the accuracy of government reporting of prices is what gave rise to the Billion Price Project.[1] So unless we posit that MIT is now 'in' on a government conspiracy to suppress price increases, we can put that one to bed.
(If I'm right, this offers evidence neither for nor against accuracy of CPI reporting -- it just makes BPP mostly irrelevant for this discussion until 10 years or so have passed)
EDIT: Wikipedia has a very good article on inflation, and I think that it would do most people a lot of good to read it and understand the various reasons people care about inflation, and where different schools of economics differ on it. http://en.wikipedia.org/wiki/Inflation
I have no idea whether "rising price inflation" has been underreported, especially by design, by the government. I would concede that there are political and bottom line reasons (e.g, minimize increases in salaries/benefits tied to COLA), but again, if this is happening, IMO it is probably more just institutional slouch than a top-secret directive from the Federal Reserve bunker.
Overall, I don't have an informed opinion what the facts of the matter are wrt to underreported inflation - I only have anecdotal evidence.
OTOH, it is pretty clear that "money supply inflation" has increased dramatically in the past few years due to the various policies associated with the bailout.
Whether this will cause "rising price inflation" remains to be seen - there is always latency between money supply increase and rising prices. In the bailout policies case, the latency is pretty large, as the bulk of the money went to securing "toxic" assets and so forth rather than directly into the consumer economy.
The overhang of this increase in money supply/government debt naturally constitutes rising price pressure, but again, how much is anyone's guess, as there are deflationary pressures as well (falling asset prices, and such).