Inflation is something we hear about regularly, and many people know only that higher inflation is bad and lower inflation is good, but what causes it? That question gets a variety of answers depending on who you ask. Milton Friedman is one of my favorite economists. He was not only brilliant (he received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory, and the complexity of stabilization policy), but he also spoke in a down-to-earth, understandable manner.

The textbook definition of Inflation is the general increase in the prices of goods and services over time, which decreases the purchasing power of money. This phenomenon is not about the cost of a single item but about a widespread rise across the economy, driven by factors such as increased consumer demand, higher production costs, or an expanding money supply. Inflation is typically measured as a percentage change in price indexes, such as the Consumer Price Index (CPI).

However, Friedman places most of the blame for inflation on the government's printing more money and injecting it into the economy, thereby reducing its value. In one of his videos, he compares inflation to alcoholism.

As Friedman explains, at first the effects may appear sound, but over time they become negative. Governments "produce" more money, typically through their central banks, to stimulate economic growth, encourage spending, lower interest rates during recessions, or manage crises such as the 2008 financial crash or the COVID-19 pandemic. This is often done by purchasing bonds in a process known as Quantitative Easing, which injects liquidity into the economy. However, if this is done excessively without a corresponding increase in economic output, it can lead to inflation and devalue the currency, as Friedman explained, you then have "too much money chasing too few goods."

Inflation is not just generated by printing more money. Central banks (such as the U.S. Federal Reserve) create money digitally, not only in paper form. They purchase assets (such as Treasury bonds) from banks, thereby increasing banks' reserves with new money. Banks then lend these funds, multiplying the money supply.

Although the rate of price increases has slowed, the overall price level continues to rise. As a result, the loss of purchasing power has not been offset by increases in real income.

The Federal Reserve and most central banks believe that 2 percent annual inflation is the "sweet spot" to encourage spending without eroding savings too quickly or risking deflation. Naturally, consumers prefer lower inflation, with surveys showing preferences closer to 0-1 percent. In essence, the acceptable rate balances economic growth with price stability, with 2 percent widely regarded as the benchmark for a healthy, growing economy.

During President Trump’s first term, the inflation rate averaged 1.87 percent annually. 2017-2.1 percent, 2018-2.4 percent, 2019-1.8 percent, 2020-1.2 percent for a cumulative total of 7.5 percent.

During Joe Biden’s term, the inflation rate averaged 4.93 percent annually, more than twice the acceptable rate. 2021-4.7 percent, 2022-8.0 percent, 2023-4.1 percent, 2024-2.9 percent for a cumulative rate of 19.7 percent.

The key point is that government fiscal policy plays a crucial role in both causing and controlling inflation. Government actions, such as spending and taxation, along with monetary policy—managed by central banks like the Federal Reserve through interest rates and money supply—are significant factors in influencing inflation.

For example, substantial government spending can increase demand (known as demand-pull inflation), while central banks may raise interest rates to cool down an overheating economy. This illustrates the government's direct influence on maintaining price stability.

I hope this helps with understanding inflation. At least you now know that the government benchmark is 2 percent. That’s considered a sign of a good growing economy. It also means that your earning capacity should increase by at least that amount to keep pace under ideal conditions.

Milt Harris——Bio and Archives

Milt spent thirty years as a sales and operations manager for an international manufacturing company. He is also a four-time published author on a variety of subjects. Now, he spends most of his time researching and writing about conservative politics and liberal folly.

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