The Causes of Inflation

One of the most common questions we receive here at Current Inflation Rate, is: “What causes inflation?” It’s a fair question. Inflation hurts the middle class, raises prices of food for the poor, and hurts the economy. So what causes it? Here’s an answer from Ludwig von Mises:

“The most important thing to remember is that inflation is not an act of God, that inflation is not a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy.”1 The simplest answer is that inflation is caused by the government.

Another cause is the fear of deflation:

“Although there are a few people who deliberately advocate a continuous upward movement of prices, the chief source of the existing inflationary bias is the general belief that deflation, the opposite of inflation, is so much more to be feared that, in order to keep on the safe side, a persistent error in the direction of inflation is preferable.”

Deflation causes the cost of services and good to decrease by increasing the worth of money.

A historical example of this can be seen in 1837 when Andrew Jackson withdrew all government funds from the Second Bank of America resulting in the failure of many banks and a five year depression.

And finally according to Milton Friedman:

“Inflation occurs when the quantity of money rises appreciably more rapidly than output, and the more rapid the rise in the quantity of money per unit of output, the greater the rate of inflation.”

The quantity of money raises when the government prints more money or when currency deposited in banks rises.

So when the government recently printed money to bail out banks that in turn deposited the new currency to keep their companies afloat the effect on inflation was astronomical. And even before the bail out when government owned companies Fannie Mae and Freddie Mac engaged in risky loans they too increased inflation.