What is Inflation?

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What is Inflation?

Weekly Blog #19

Inflation is always and everywhere a monetary phenomenon.” Milton Friedman 

It seems every politician eventually promises to “make life more affordable.” It’s a crowd-pleaser. Who doesn’t want their dollars to stretch further? But how, exactly, do they plan to make that happen? The devil, as always, is in the details.

First, let’s talk about a term everyone’s heard but few truly understand—including many so-called experts—inflation.

The modern definition goes something like this: “Inflation is an increase in the average price of goods and services as measured by a price index, typically the CPI.” To most people, inflation means “rising prices.” That’s not wrong, but it’s not the full story either. In fact, it’s a revisionist definition.

For much of history, inflation referred not to prices but to money itself. A 1919 Federal Reserve Bulletin defined it plainly: “Inflation is the process of making additions to currency not based on a commensurate increase in the production of goods.” In other words, inflation was a noun describing monetary policy, not a verb describing higher prices. Over the past six decades, policymakers and academics quietly redefined it, divorcing inflation from money supply and blaming prices instead.

Fast-forward to today. After two years of “Fedsplaining” that pandemic stimulus wouldn’t spark inflation—and that any CPI increase was transitory—Jerome Powell finally cried uncle. With year-over-year CPI peaking at 9.1% (roughly 455% above the Fed’s 2% target), even Powell had to admit that higher prices were secular—here to stay.

When pressed on the cause, Powell reached into the economist’s playbook and tossed out the usual jargon: cost-push, demand-pull, external shocks, and the like. Impressive-sounding, but mostly horse manure. Somehow, he forgot to mention that the Fed had increased the money supply by more than 40% in just two years — nearly four times faster than the norm. Coincidence? Please.

Classical economics teaches that price is a function of two variables: supply and demand. If you flood the economy with cash—stimulus checks, PPP loans, zero-interest rates—while simultaneously shutting down large chunks of the “non-essential” private sector, it doesn’t take a Nobel laureate to predict what happens next: prices rise.

Sure, short-term shocks like wars, droughts, or trade disruptions can nudge prices, but over time, monetary policy drives the bus. When the money supply grows faster than output, each dollar buys less. Inflation isn’t mysterious; it’s just math.

So, back to our original question: how can politicians make life more affordable?

There are two basic approaches. The first is demand-side policy, which focuses on subsidizing the end-user, i.e., taking money from taxpayers and redistributing it to the “needy.” Virtually every progressive “affordable” program, from housing to healthcare, relies on this magic S-word: subsidies.

It sounds compassionate until you realize subsidies don’t make things cheaper; they make them more expensive. Subsidies artificially boost demand while doing nothing to increase supply. The result? Higher costs systemwide, masked by temporary price relief for a select few.

Take healthcare. When the Affordable Care Act passed in 2010, we were told it would lower costs. Yet since then, national healthcare spending has doubled, and even after adjusting for inflation, it’s up more than 55%. Why? Because providers had no incentive to innovate or reduce costs—they were simply guaranteed payment.

Contrast that with sectors where government largely stays out. Since 2010 the price of TVs has dropped 70% while quality improved exponentially. Data plans fell from $0.09/MB to $0.003/GB. Computer memory dropped from $1.50/GB to $0.035/GB. That’s what happens when competition (the market), not Congress, sets prices.

Since cost is determined by just two variables; supply and demand, the only sustainable way to make things cheaper is to increase supply through innovation and efficiency. Produce more widgets for the same or lower cost. Every other “solution” just rearranges the bill—taking from one pocket to fill another.

So the next time a politician vows to make life “more affordable,” ask the follow-up question: “How, exactly?” If their answer doesn’t involve lowering regulatory burdens, cutting taxes, embracing innovation, and letting the free market compete, the plan is simple—you’re the one writing the check. 

Mark Lazar, MBA
CERTIFIED FINANCIAL PLANNER™

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Savina Lazar

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Mark Lazar, Managing Partner

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Mark has a BS in finance from the University of Utah, MBA from the University of Colorado, and was an adjunct professor of finance at the University of Utah for eighteen years. Mark recently retired after 25 years as senior vice president of a wealth advisory firm in Salt Lake City.

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