Inflation Is When Everything Costs More and Everyone Has a Theory

The Theory Circus

Inflation is when everything costs more and everyone has a theory. The supply chain did it. Vladimir Putin did it. Corporate greed did it. Workers asking for raises did it. The supply chain again. Each camp has a villain and a chart. Politicians have talking points. Twitter has threads. The only thing they share is the certainty that the other explanations are wrong. It is a carnival of causes. Meanwhile the prices are still up. The theories do not lower them.

So let us do something unfashionable: name the one cause that actually fits the story. Not the only thing that affects prices in the short run — supply shocks and bottlenecks can move relative prices and cause temporary spikes. But sustained, across-the-board inflation — the kind that lifts the whole price level and stays lifted — has one source. More money chasing the same (or fewer) goods. And who creates and spends the money that can chase everything? The government. That is not a talking point. It is Milton Friedman, and he was right.

Always and Everywhere a Monetary Phenomenon

Friedman said it plainly: inflation is always and everywhere a monetary phenomenon. He did not mean that only the central bank matters. He meant that a persistent rise in the general price level cannot happen without the money supply growing faster than the real economy. Supply chains can shift which goods go up first. Geopolitics can add a tax. But economy-wide, lasting inflation requires that there is more money in the system than the system is producing in real terms. Someone has to be creating and spending that money. That someone is the state — through deficit spending, and through the monetary authority that finances or accommodates it. No sustained inflation without it. Nothing else gets you there.

So when you hear that inflation is "really" about corporate greed, ask why corporations suddenly became greedy in the same year the government wrote the largest checks in history. When you hear it's wages, ask why wages would push prices up in a lasting way without an expansion of the money that pays them. When you hear it's the supply chain, ask why the supply chain "broke" just when demand was flooded with new purchasing power. The stories are not wrong in every detail. They are wrong as the cause. They are excuses. The only thing that increases inflation in the sense that matters — persistent, general inflation — is government spending (and the monetary policy that enables it). Nothing else.

The Dry Summary

Pundits will rotate villains. Politicians will blame each other and the other party and the Fed and the firms and the workers. You will hear that it's complicated. It is and it isn't. Complicated is the distributional mess of who pays. Simple is the mechanism: too much money, too much spending by the entity that can print and borrow without limit. Friedman said it. The data have not contradicted him. The theories have. They will keep contradicting him, because admitting it would require admitting who holds the lever. So: inflation is when everything costs more, and everyone has a theory except the one that names the only cause that fits. This was that one.

— Horace Ledger