What Really Causes Inflation?

[mystery-ak]

What Really Causes Inflation?

We have enough recent history under our belt at this point to make a good guess.

James T. Moodey | July 29, 2026

The fact that inflation is not necessarily caused by the money supply was proven in the 1970s, and economists did not notice.  It was proven again during President Obama’s tenure.

Milton Friedman is my idol.  However, if he said, “Inflation is always a monetary phenomenon,” that is a white lie.  Read on to learn why he would have said that.

I graduated in 1973 with my economics degree and began crunching numbers on any problem that I saw.  In 1974, the first oil crisis occurred.  People awoke in a panic that they needed gas and would be late for work.  Many gas stations had only one pump running, and there were lines of cars.  People were standing by their cars spewing blame.

I thought, “OK, fellow economists — explain what is causing this.”  Not a single economist here or in Europe explained the cause.  They were silent in the second crisis as well.  So I started a file and began to study the oil crisis and the ensuing inflation.

In 1970, a delivered barrel of oil cost a low of $1.20.  By 1980, as a direct result of three enormous tax increases, it cost about $37 per barrel.  In 1970, a bulldozer struck a large pipeline in the Saudi peninsula.  The pipeline was shut down for about two weeks.  The spot market price of oil shot up $6 to about $8 before it went back down.  Moammar Gaddafi remembered that, and when a shortage occurred in 1974, he called Armand Hammer of Occidental Petroleum.  He told him he was adding a $6 tax to Occidental’s oil.  OPEC followed Gaddafi’s lead.  When the second crisis occurred in 1978, OPEC added an $8 tax, and oil settled at about $13 per barrel.  Milton Friedman complained that this was causing inflation.

Naturally, the media blamed oil companies.  Democrat hysteria began to impose a “windfall profits tax.”  Milton Frieman became very vocal.  He implored Jimmy Carter not to impose the tax, and Carter agreed.  The media were in control, and Carter changed his mind.  He signed the windfall profits tax legislation.  It took effect the next year, in 1980, and oil leaped to $37 in that year.  Inflation surged to 14 percent.  It had risen almost 10 percent since 1974 due to the rising cost of oil.   

Rising oil prices caused the inflation.  Friedman knew that.  It was obvious.  The hysterical hatred of Big Oil was ineradicable from Democrat minds.  Friedman had lost that argument, so he switched to a new one.  He decided that his only other tool might be for the Fed to slow the economy.  However, that is like killing the patient to cure the disease.

The Fed was reluctant.  Friedman said all kinds of things to make that happen, even a white lie.  I felt he should say anything to stop runaway inflation.

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https://www.americanthinker.com/articles/2026/07/what-really-causes-inflation/

[Bigun]

Rising oil prices caused the inflation.

Does one need a degree in economics to figure out that the price of oil affects EVERYTHING?

[DefiantMassRINO]

Those who contend that inflation is always monetary - like current Fed Chair, Kevin Warsh - are wrong.

That guy has a boner to raise interest rates, economy and employment be damned.  He has something to prove, and he'll do it at the expense of employment.

Money supply is one component of price, but not 100%.

Price - with fixed currency values - is relative to supply and demand of goods and services.

Interest rates are the price of money/credit.  In a free market, Interest rates go up when demand for money is greater than supply.  Interest rates go down when demand for money is less than supply.

The Great Depression and the Great Recession were rapid deflationary death spirals - the supply of money/credit shrank rapidly.

The Weimar Republic is often used as an example of excess monetary supply leading to inflation, but more accurately, it was currency devaluation.

The late Roman Empire experienced currency devaluation as they reduced the precious metal content in their coinage as a means of growing nominal money supply to pay the Roman Army.

IMHO, the primary reason monetary theory zealots focus on money supply is to preserve the value of long-term debt instruments, which benefits banks and Governments.

When the interest rate sufficiently exceeds inflation, a loan is better able to maintain its nominal price value.  When inflation exceeds interest rates, a loan's nominal price value drops.

To make things more complicated, when the Fed raises interest rates, the collateral value of long-term Government debt instruments drop.  When the Fed raised rates too much, too fast, a couple of banks in California quickly became insolvent because the nominal price value of their 30-year Treasury Bonds, held as bank reserves, decreased to technically make the banks insolvent.

When the Feds lower interest rates, the nominal price value of fixed rate long-term Government bonds increases.

So, when the Fed raises rates, the price of fixed-rate bonds decrease; when the Fed lowers rates, the price of fixed-rate bonds increase.

The Federal Reserve's mission is not price stability nor employment stability, it is the stability of the banks, especially when monetary theorists are at the helm.

Monetary theory completely ignores supply-side economics - reducing prices by increasing supply, improving efficiencies, and increased long-term capital investments to increase supply at lower cost per unit.

Zimbabwe, the Weimar Republic, and the late Roman Empire are use cases for monetary theorists, but those are extreme examples of currency devaluation by their Governments to make nominal payments on their obligations.  The Governments printed money because they had insufficient GDP growth to sustain the operational costs of Government.

Monetary theory also ignores the contributions of fiscal policy to inflation.  The current domestic inflation regime is primarily the result of bad fiscal policy since 2000.  Fiscal policy has constrained supply of goods and services, increasing their nominal costs per unit.  Also, bad Globalist trade policy has decimated our domestic production capacity, which makes us more vulnerable to foreign supply disruptions.

So, the inflation does lie not in our monetary policy stars, it lay in our bad Government policy.

Government is the cause of inflation because its bad policies have prevented free market economics from increasing supply at lower cost per unit.

[roamer_1]

Too many dam Benjamins. PERIOD.
Every time they print a dollar we ain't got, that dollar devalues every other dollar that's out there.

When they are printing, what, eight trillion dollars? Well, it ain't rocket science.

Taxes ain't enough for this giant government, so they just print what they need. And the more they print, the more they devalue the Yankee Buck, so the more they need, and the more they print.

You need only look to history to know the answer, and knowing that, know exactly how it will conclude.

[DefiantMassRINO]

Government prints money when Government is too big for current GDP.

[roamer_1]

Government prints money when Government is too big for current GDP.

Government is always too big. Always. The only way it stops is if folks are jealous of every single penny they LET the government have... And when the government is down on it's knees begging with a tin cup.. Well then that is tolerable.

[catfish1957]

Oil is (was) the  pivot point of the past inflationary event.

And that exact moment was Day 1 of the Biden Admin, when he killed the Keystone Pipeline and domestic oil production.  It all domino-ed from there.

[DefiantMassRINO]

bad Government policy = inflation

Oil is (was) the  pivot point of the past inflationary event.

And that exact moment was Day 1 of the Biden Admin, when he killed the Keystone Pipeline and domestic oil production.  It all domino-ed from there.

[Luis Gonzalez]

Wow... this gets published by AT?

Your article correctly points out that oil price shocks can drive significant inflationary pressure. Few economists would dispute that. Where your argument loses me is when it concludes that monetary policy is therefore largely irrelevant.

The question your article never answers is this:

**If oil prices alone explain sustained inflation, why didn't prices simply rise to a new equilibrium and stop? What mechanism kept inflation running through the late 1970s?**

A supply shock can explain a sharp increase in prices. It does not, by itself, explain years of continuing inflation. That is precisely why economists examine monetary policy, inflation expectations, wage growth, and other factors alongside energy prices.

One more point: accusing Milton Friedman of telling a "white lie" requires evidence, not inference. Friedman openly acknowledged that oil shocks raised prices. His argument was that whether those shocks became sustained inflation depended on monetary policy. You may disagree with his theory, but that is very different from saying he knowingly misled people.

The 1970s remain one of the most studied periods in economics precisely because there was no single cause. Reducing the entire episode to oil is no more convincing than reducing it entirely to the money supply.

[Bigun]

Wow... this gets published by AT?

Your article correctly points out that oil price shocks can drive significant inflationary pressure. Few economists would dispute that. Where your argument loses me is when it concludes that monetary policy is therefore largely irrelevant.

The question your article never answers is this:

**If oil prices alone explain sustained inflation, why didn't prices simply rise to a new equilibrium and stop? What mechanism kept inflation running through the late 1970s?**

A supply shock can explain a sharp increase in prices. It does not, by itself, explain years of continuing inflation. That is precisely why economists examine monetary policy, inflation expectations, wage growth, and other factors alongside energy prices.

One more point: accusing Milton Friedman of telling a "white lie" requires evidence, not inference. Friedman openly acknowledged that oil shocks raised prices. His argument was that whether those shocks became sustained inflation depended on monetary policy. You may disagree with his theory, but that is very different from saying he knowingly misled people.

The 1970s remain one of the most studied periods in economics precisely because there was no single cause. Reducing the entire episode to oil is no more convincing than reducing it entirely to the money supply.

There are many things that can cause inflation and most of those things are enabled by FIAT Money!

[andy58-in-nh]

There are many things that can cause inflation and most of those things are enabled by FIAT Money!

A few quick thoughts, perhaps incomplete.

"Funny money" is always the root cause of inflation. Currency manipulation by governments through their central banks takes many forms these days. "Money printing", as such is no longer the main culprit, as physical currency itself has become less a medium of exchange than digital alternatives. 

Instead, in the U.S., the Federal Reserve digitizes funds to lend to member banks (credit creation), manipulates interest rates, and engages in "Open Market" operations including the sale of bonds, repurchase agreements and even equity trades. All of this is to facilitate government spending that would otherwise be restrained by the conventional economic limitation of simply not having enough damned money... that is, unless additional taxes were to be raised and collected, which political sentiment makes difficult.

We want our benefits, but want someone else to pay for them. People get performatively angry about deficit spending.... but the same folks often wouldn't like the alternative.  Blame the government, if you'd like. But that's really on us. We vote for the crooks, over and over. And somehow we expect different results. 

Prices for goods and services are normally a function of supply and demand. When prices for a specific commodity increase, most people view that as an incident of "inflation", and that is how it is commonly understood. But the cause(s) may be entirely natural, as opposed to the function of artificial credit expansion by government. Oil prices are a good example. They have risen as the general price level for everything has gone up, consequent to governmental monetary manipulation. But oil prices are far more sensitive and responsive to supply disruptions and transportation risks than to monetary policy, as we have recently witnessed. 

[GrouchoTex]

Top 2, in no particular order:

Energy moves everything.
Gas, Diesel, Jet fuel, etc...

Feds printing money.

[DefiantMassRINO]

1970 ... Environmental Protection Act ... expansion of Government regulations
1971 ... the US got off the Gold Standard for international conversion ... imports became more expensive
1973 ... Yom Kippur War oil shock ... energy imports became exponentially more expensive
1974 ... Watergate
1975 ... withdrawal from Vietnam
1979 ... Iran hostage crisis / Iran oil embargo

The nominal cost of inputs rose with insufficient productivity gains to offset subsequent increases in the price of outputs.

[catfish1957]

bad Government policy = inflation

Yeah, contextually....   BUT..  this last inflation crisis did start at the exact time on day 1 when Biden killed the XL pipeline, squashed US oil production, which then trickled all the way down the supply chain to the meal on the table.