Quite likely most people think inflation is just something that happens. Let’s be clear, there is a simple, clear cause of inflation: increasing the money supply
This really is a simple concept. Stop and think about it for a moment. If you have more money tomorrow than you have today aren’t prices going to adjust for this? If today I have $100, but tomorrow I magically have $200 won’t I be more willing to spend more to buy what I want? And if I’m willing to spend more, then won’t the vendor be willing to increase the price they charge?
Well, how does the money supply increase? The Central Banks (also known as the “Federal Reserve”) “prints” money. This is now more electronic than actual printing of paper money.
Where does this money go? This part gets a little tricky. Short version is that the central banks buy government bonds (fund the government).
But I’ve heard that rising energy (gas / oil) prices are the cause of inflation? Yes, higher energy prices are going to tend to push up the cost of most other items. But energy is subject to the laws of supply and demand. If gas prices increase, most people can drive less or buy a car with better gas mileage.
Neel Kashkari (CEO of the Minneapolis Federal Reserve Bank) is promoting the idea that the cost of energy is the key driver of inflation.
Putting the blame for inflation on energy costs is quite common currently. However if we look at a similar situation back in the 1970s, inflation was well on it’s way before the dramatic rise in oil prices. Likewise, currently we had a change in administration, with a change in policies, which accelerated “printing money”. High oil prices didn’t force money to be printed (the real cause of inflation).
This isn’t secret, even the people running the Central Banks (like Lutz Kilian – head of the Texas Federal Reserve Bank) are talking about this and explaining it to those interested in deep analysis.
Something to note is that historically real wages have fallen in response to inflation. Yet another reason for the common worker to fear inflation. The wealthy benefit from inflation, the common citizen is hurt by inflation.
Consider this statement: “How do you crush inflation? By raising interest rates well above the level of inflation, and thereby demonstrate to the public that spending will fall, because the central bank is making it crystal clear that it will do everything in its power to encourage saving and discourage spending.” - For financially educated people to make a statement like this indicates to me they don’t really understand inflation (or are misusing the term). As well as failing to comprehend reality. Saving is great and not done enough by individuals, corporations or government. However, choking the economy and sending us into a recession is not an acceptable solution!
If you’d like to dig deeper or hear different points of views, these references may be valuable to you.
In particular I would recommend the relatively unbiased information in the Wondrium (The Teaching Company / Great Courses) college course: “Money and Banking” (Professor Michael Salemi – University of North Carolina) especially lecture 29 “The Objectives of Monetary Policy”.
Energy and Inflation: Drivers and Solutions
Inflation and Its Consequences for Families with Low and Moderate Incomes (Neel Kashkari)