Series: What causes inflation

Would you believe we don’t really know what causes inflation and there are several competing theories? Seriously.

What causes inflation: Image shows a bunch of rolls of USD hundred dollar bills

How we can better understand what causes inflation?

This entry is part 1 of 6 in the series What causes inflation

To examine what causes inflation, we must first define what inflation is, and believe it or not, there is some disagreement here. Definitions of inflation The common idea between various definitions can be boiled down to… An increase in the cost of living over time as the prices of goods and services rise. Some definitions …

How we can better understand what causes inflation? Read More »

Quantity theory of money inflation: The picture shows the famous quantity theory of money equation

Why is the quantity theory of money inflation known to be wrong?

This entry is part 2 of 6 in the series What causes inflation

The quantity theory of money inflation is the idea that inflation is a simple phenomenon that is caused by adding money to an economy. It is represented by that fairly famous equation shown in the image at the top of this post. I’ll explain what that equation says, how it is used to derive the …

Why is the quantity theory of money inflation known to be wrong? Read More »

Market power theory of inflation: Chart showing the degree of corporate consolidation among consumer brands in the United States

Does the market power theory of inflation explain reality?

This entry is part 3 of 6 in the series What causes inflation

What is the market power theory of inflation? The market power theory of inflation simply states that if a firm, or a collection of firms working together, have enough dominance within a market, they set prices for the market. These firms are often referred to as “price makers” for what should be obvious reasons, and …

Does the market power theory of inflation explain reality? Read More »

Demand-pull and cost-push inflation: Image shows two charts, one for each

What are the Demand-Pull and Cost-Push Inflation Theories?

This entry is part 4 of 6 in the series What causes inflation

While demand-pull and cost-push inflation theories are different, they seem, to me, to be two different sides of the same coin. They are both based on the basic concept that prices are a function of supply and demand. I can’t state these ideas fully explain inflation, but they’re so obviously true, even in limited applications, …

What are the Demand-Pull and Cost-Push Inflation Theories? Read More »

Structural theory of inflation: Chart showing Mark-Up Theory and Bottle-Neck Inflation

Does the structural theory of inflation show up in reality?

This entry is part 5 of 6 in the series What causes inflation

First, I wish to state that the structural theory of inflation is the one that I personally understand the least. Likely as a result of having had the privilege of living my entire life in countries with well-developed economies (Canada and the United States) and as such, not personally seeing evidence of this in my …

Does the structural theory of inflation show up in reality? Read More »

Rational expectations theory: Image of the book cover

Why is the rational expectations theory of inflation worth paying attention to?

This entry is part 6 of 6 in the series What causes inflation

The rational expectations theory of inflation is part of the neoclassical focus of modern economics (the word “rational” probably gave it away), which was first described in a paper by John F. Muth published in 1961. I think there is evidence to suggest that it is both very influential, and used to justify poor economics, …

Why is the rational expectations theory of inflation worth paying attention to? Read More »