Regardless of the government’s fiscal profligacy, it does not necessarily follow that there must be inflation. Most intermediate textbook treatments of inflation will identify three ‘causes’ of inflation: cost-push, demand-pull and monetary. The first operates through the supply side, e.g. a bad monsoon will push food prices up. The second through the demand side, and the third through central bank (in)competence.
This rather sterile slicing and dicing is easy prey to the Milton Friedman challenge: Supply-side and demand-side inflations are about relative prices, which do not necessitate an increase in the overall price level. Inflation is everywhere and always a monetary phenomenon.......Read More