What Most People Get Wrong About Why Things Cost More

Inflation is not a mystery. It is not bad luck. It is not "the economy." It is the predictable result of three forces being pushed in the wrong direction at the same time. Once you can name those forces, the last forty years of price history stops looking random and starts looking like cause and effect.

The cleanest way to see this is to play with it. I built a small interactive tool, the Inflation Simulator, where you can move the dials yourself and watch prices respond. This article is is meant to provide additional context.

The Three Dials of Inflation

Strip away the jargon and inflation comes down to three dials moving at once:

1. The money dial. How fast is the total supply of money growing relative to the economy that is supposed to absorb it?
2. The supply dial. Is the physical world able to deliver the goods and services people want, or is something blocking it?
3. The expectations dial. Do people believe prices will keep rising, and are they pricing that belief into wages, contracts, and rent?

Every major inflation in modern history can be told as a story about which dials moved, in what order, and how long it took policymakers to admit what was happening. Deflation is the same story in reverse.

The money dial: why "too many dollars chasing too few goods" is not a slogan

If the money supply doubles and the amount of stuff in the economy stays the same, the price of stuff must roughly double. There is no other place for the extra money to go. This is not ideology. It is arithmetic.

Milton Friedman put it most directly: "Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output." (Milton Friedman, "The Counter-Revolution in Monetary Theory," 1970, later reprinted in Money Mischief, 1994.)

The COVID era is the cleanest test of this idea in fifty years. Between March 2020 and the end of 2021, the Federal Reserve drove a $6.4 trillion increase in the M2 money supply, a 42% expansion in 22 months. This was far more than could be absorbed by economic growth, even with the strong recovery. M2 growth peaked at 26.9% year over year in February 2021, the fastest sustained rate of money supply expansion in peacetime since the founding of the Fed in 1913.

What happened next was not a coincidence. Headline US inflation rose to 7.5% in January 2022, the highest rate of increase since 1982. CPI peaked at 9.1% in June 2022. The Federal Reserve called it "transitory" for almost a year before admitting it was not.

Why I do not buy Modern Monetary Theory

This is the part of the argument where serious people will push back, so it deserves serious treatment. MMT does not literally say "spend until inflation hits and then react." Its careful version says a country that issues its own currency faces a real-resource constraint, not a financial one, and that fiscal policy should be calibrated to inflation risk in advance. Stephanie Kelton, Pavlina Tcherneva, and Randall Wray have all written that inflation is the binding limit and that fiscal tightening should kick in when capacity gets tight.

I take that framing seriously. I still do not buy it. Here is why.

The political-economy problem is the core defeater. MMT's prescription requires Congress to raise taxes or cut spending in real time when inflation starts to bite. Congress cannot do this. Congress has never done this. The 2021 American Rescue Plan passed in March 2021 with M2 already growing at over 25% year over year and clear signs of capacity strain in the labor market and goods sector. The political coalition that voted for the spending was incapable of turning around and voting for the tightening MMT requires once inflation began. This is not a flaw in execution. It is a flaw in the theory's assumption about how legislatures work. Any framework whose stabilization mechanism depends on Congress being fast, technocratic, and willing to inflict pain is not a serious framework. It is a thought experiment.

The "we never really tried MMT" defense proves too much. If the 2020 to 2022 response was not MMT because the Job Guarantee was not in place and Congress did not tighten when needed, then by the same logic MMT is unfalsifiable. There is no real-world episode that could refute it, because any inflation that follows can be attributed to incorrect calibration rather than the framework itself. A theory that cannot lose is not a theory I will use to make decisions about real money.

The supply-side rebuttal is the strongest counterargument and it still does not get MMT off the hook. It is fair to say that pandemic supply disruptions and the Ukraine war contributed substantially to the 2021 to 2023 inflation. They did. It is also fair to point out that inflation came down in 2023 and 2024 without the deep recession that purely monetarist models would predict, which is real evidence that demand-pull was not the whole story. I concede both points. What I do not concede is that the 42% expansion in M2 was incidental to the inflation. The timing is too clean. The cross-country pattern is too consistent (countries that expanded their money supply most aggressively saw the highest inflation peaks). And the persistence of services and shelter inflation well after supply chains normalized points to embedded demand-side pressure that money creation funded.

On the distributional point, I will give partial ground. The pandemic transfers measurably reduced poverty in 2020 and 2021. The expanded Child Tax Credit cut child poverty to historic lows before it expired. That matters and I will not pretend it did not happen. But the inflation tax that followed was paid disproportionately by households who do not own homes, do not own stocks, and depend on wage labor and fixed transfers. The same demographic that benefited from the transfers ate most of the inflation that came after them. The net distributional picture is more mixed than my original framing suggested, but it is not the win that MMT proponents claim.

The honest summary: the COVID-era episode is not a clean refutation of MMT in MMT's careful version. It is a clean refutation of the loose version that gets political traction. And the careful version has a political-economy problem that, as far as I can tell, its proponents have not solved. Until they do, I will keep my framework simple. Money creation that outruns real output produces inflation with a lag. The Fed and the legislature should both act like this is true.

The supply dial: when the world cannot deliver

The supply dial is the simplest one to feel and the most politically convenient to blame. If oil supply collapses, if shipping containers cannot move, if a war takes 30% of global wheat exports offline, prices rise even when the money dial is steady.

The 1973 oil embargo is the textbook example. OPEC cut output, the price of crude quadrupled, and every economy that ran on cheap oil paid the bill in shoe leather, plane tickets, and grocery bills. The 2021-to-2022 supply chain crisis was the modern version: ports backed up, semiconductor lines stalled, trucking capacity short, and an invasion of Ukraine pulled energy and grain off the market.

Supply shocks matter. But here is the part most coverage gets wrong: a supply shock does not have to become entrenched inflation. It only does if the money dial and the expectations dial are already loose. By 2022 it was clear that supply chain disruptions were no longer the main story. The much larger reason for persistent inflation was the unprecedented growth in the money supply since March 2020.

The expectations dial: the part that makes inflation sticky

Once people stop believing prices will return to normal, they act on that belief, and the belief comes true. Workers demand raises to keep pace. Landlords raise rents to keep pace. Businesses pre-emptively raise prices because their suppliers are. The expectation becomes the cause.

This is what made the 1970s so painful and what makes the post-COVID period genuinely dangerous. Once expectations un-anchor, the central bank's only real option is to crush them. That was Paul Volcker's job in 1979. He raised the federal funds rate to roughly 20% by 1981, triggered a deep recession, and broke the back of double-digit inflation. It worked. It also cost millions of jobs.

A short history of dial settings

The same three dials, set in different combinations, explain almost every famous inflation and deflation episode of the last century.

The extremes are instructive. Weimar Germany printed money to pay war reparations, lost industrial capacity, and watched expectations collapse. Prices doubled every few days at the peak. Zimbabwe's central bank financed government spending while land reform destroyed farm output. Inflation peaked in the billions of percent. Japan's three lost decades show the same logic running the other direction: tight money plus collapsed expectations equals persistent deflation that monetary policy alone cannot fix.

The pattern is consistent. Inflation requires the money dial to move first or move with a supply shock. Deflation requires the money dial to stay tight while expectations collapse. Once you see the dials, you stop being surprised by the outcomes.

What the simulator teaches that prose cannot

The reason I built the Inflation Simulator is that the interactions between the dials are not intuitive. You can describe them in writing, but you do not feel them until you try to bring a 1970s-style inflation back to 2% by yourself, with the Fed funds rate as your most powerful lever but not your only one.

Try the 1970s scenario in the tool. Inflation is running at roughly 9%. Wages are climbing. Oil is up. Expectations are at 6%. You will discover, very quickly, that raising rates a little does not work. The expectation dial holds inflation up even when you tighten the money dial. The lesson of Volcker's tenure is in the math: half-measures fail.

Try the deflation scenario. The instinct is to print money. The harder lesson is that once expectations have collapsed, even aggressive money-supply growth takes a long time to bite. Japan has been running this experiment for thirty years.

Most "inflation explanations" are political theater

When prices rise, every political faction has a preferred villain. Corporations are price-gouging. Workers are demanding too much. Foreign producers are charging more. Speculators are hoarding. These claims are not all wrong, but they all describe symptoms. They do not describe causes.

The cause is almost always the money dial moving first. The supply dial determines the shape and timing of the pain. The expectations dial determines how long the pain lasts. Anyone telling you a different story has a political reason for doing so. The honest story is dull and arithmetic. (Also read: When AI Breaks the 30-Year Mortgage)

So what?

If you accept that inflation is the predictable result of three dial settings, three things follow.

First, the money supply is not a technical curiosity for economists. It is the most important number nobody outside finance pays attention to. Track it.

Second, stimulus is not free. Every dollar created by the Fed and spent by Congress eventually shows up in prices somewhere, somehow, with a lag of roughly one to two years. The COVID-era stimulus was the largest peacetime money creation in US history, and the inflation that followed was not bad luck. It was the receipt.

Third, the next inflation cycle will look different on the surface and identical underneath. The dials do not change. The settings do.

Key Takeaways

• Inflation is not random. It is the result of three dials: money supply growth relative to output, the supply of real goods, and inflation expectations. Every major episode in modern history fits this frame.
• The COVID-era inflation was monetary at its core, even though supply shocks added to it. A 42% expansion of M2 in 22 months, the fastest peacetime expansion in over a century, funded the demand-side pressure that supply disruptions then translated into a 9.1% CPI peak.
• Modern Monetary Theory has a political-economy problem its proponents have not solved. MMT requires Congress to fiscally tighten in real time when inflation rises. Congress cannot do this, and the 2020 to 2022 episode is the evidence. Even in its careful form, MMT depends on a legislative behavior that does not exist in the real world.
• Supply shocks alone do not cause persistent inflation. They only become entrenched when the money dial is already loose and expectations are drifting.
• Once expectations un-anchor, the only real fix is pain. Volcker proved it in 1981. Every central bank since has been trying to avoid having to repeat it.
• Deflation is not the opposite problem. It is the same framework in reverse, and Japan's thirty-year struggle shows how hard it is to escape once expectations collapse.

FAQ

What is M2?

M2 is the broadest measure of the money supply that most people pay attention to. It includes physical currency, checking and savings accounts, money market accounts, and other short-term deposits that can be quickly converted to cash. The Federal Reserve tracks M2 weekly. When you hear "the money supply grew by X%," it usually means M2. The chart in this article shows M2 growth peaking at 26.9% year over year in February 2021, the fastest sustained peacetime expansion in over a century.

What is CPI?

The Consumer Price Index is the most-watched measure of US inflation. It tracks the average change in prices paid by urban consumers for a fixed basket of goods and services, including food, housing, transportation, medical care, and education. It is calculated monthly by the Bureau of Labor Statistics. When the news says "inflation hit 9.1%," that is CPI rising 9.1% from the prior year. CPI is not perfect (it does not capture every household's experience), but it is the benchmark.

What is the federal funds rate?

The interest rate banks charge each other for overnight loans of their reserves at the Federal Reserve. The Fed sets a target range for this rate at every FOMC meeting. It is the most direct policy tool the Fed has. When the Fed "raises rates," this is the rate being raised. Higher fed funds rates ripple through the entire economy, making mortgages, car loans, credit cards, and business borrowing more expensive, which cools demand and pushes inflation down.

What is quantitative tightening?

The opposite of quantitative easing. During QE, the Fed creates new money to buy bonds, which expands the money supply. During quantitative tightening (QT), the Fed lets bonds on its balance sheet mature without replacing them, which shrinks the money supply. QT is a slower, less visible tool than rate hikes, but it directly attacks the money dial.

What is Modern Monetary Theory (MMT)?

MMT is a school of economic thought that argues a government issuing its own currency faces a real-resource constraint rather than a financial one. In the careful version put forward by economists like Stephanie Kelton and Pavlina Tcherneva, fiscal policy is supposed to be calibrated to inflation risk in advance, with tax increases or spending cuts kicking in when capacity gets tight. I do not buy it. The central problem is political-economy: MMT requires Congress to fiscally tighten in real time, and Congress is structurally incapable of that. The 2020 to 2022 episode illustrates the point. By March 2021 the warning signs were already visible, but the political coalition that voted for the spending could not turn around and vote for the tightening. Any framework that depends on legislative behavior that has never occurred is not a usable framework.

What is deflation?

The opposite of inflation: a general fall in prices over time. It sounds attractive but is widely considered worse than moderate inflation. When prices fall, people delay spending in expectation of better deals, businesses cut investment, wages drop, debts become harder to repay in real terms, and unemployment rises. Japan has been fighting deflation since the early 1990s with limited success, which is why central banks target a small positive inflation rate (around 2%) rather than zero.

What are the three dials of inflation?

They are the three forces that determine whether prices rise, fall, or hold steady: the rate of money supply growth relative to real output, the supply of physical goods and services available in the economy, and the inflation expectations of workers, consumers, and businesses. Every modern inflation episode can be described as a specific combination of settings on these three dials.

Was COVID stimulus the cause of the 2021 to 2023 inflation?

It was the necessary condition. The M2 money supply grew 42% between March 2020 and the end of 2021, the fastest sustained peacetime expansion since the Federal Reserve was founded. Inflation peaked at 9.1% roughly 18 months later, consistent with Friedman's "long and variable lags." Supply chain disruptions and the Ukraine war added to the spike in real ways. But the cross-country pattern (countries that expanded their money supply most aggressively saw the highest inflation peaks) and the persistence of services and shelter inflation well after supply chains normalized both point to demand-side pressure that the money creation funded.

Why did the Federal Reserve call the inflation "transitory"?

The Fed initially attributed the 2021 inflation to temporary supply chain issues from the pandemic, expecting prices to settle once shipping and production normalized. By late 2021, with money supply still elevated and inflation accelerating, Chair Jerome Powell publicly retired the word "transitory." Critics argue the Fed underweighted the monetary side of the story for political and institutional reasons.

How does a central bank actually fight inflation?

The most direct tool is the federal funds rate, the interest rate banks charge each other for overnight loans. Raising it makes borrowing more expensive throughout the economy, which cools demand. The Fed also shrinks its balance sheet (quantitative tightening), which reduces the money supply directly. Both tools work with a lag of roughly six to eighteen months.

INFLATION SIMULATOR (play it yourself, take the quiz!)

About the Author

Martin Goetzinger has spent his career in enterprise software sales, helping large organizations such as Apple, Microsoft, and Verizon connect data, insight, and action. His work focuses on transforming how businesses measure success and create customer value through technology.

Outside the enterprise world, he writes about the five forces he believes are reshaping everything: AI, blockchain, energy, personalized health, and robotics. These forces are viewed not purely from a technical lens, but from a human one, showing how these technologies will redefine work, wealth, and well-being.

He is based in the U.S. and publishes at www.MartinGoetzinger.com.

Disclaimer

The views expressed in this article are the personal opinions of the author and are provided for informational and educational purposes only. Nothing in this article constitutes investment advice, financial advice, legal advice, or any other form of professional advice. Do not make investment or financial decisions based on the content of this article. Always consult a qualified professional before making decisions that affect your finances, business, or livelihood.