Restore Price Stability

What drives inflation

Nobody taught us monetary theory. Not in high school. Not in most college economics courses. So when prices spike, we do what makes intuitive sense — we blame companies and politicians for the prices we see rising: gas companies, grocery chains, the guy in the White House.

Financial journalists are of little help. They are equally untrained, and their coverage reflects it — focusing on individual price spikes rather than the monetary conditions that drive general inflation. Given how consistently they describe the symptom rather than the disease, it is no wonder the public never sees it for what it is.

That confusion is exactly what politicians count on. Presidential campaigns are full of promises to “lower prices” — which sounds reassuring until you realize the executive branch has no direct ability to do it. Inflation is not caused by corporate greed or supply chain disruptions. It is a monetary phenomenon, generated by excess Federal Reserve money creation. When the Fed creates money faster than the economy produces goods and services, prices rise. Too much money, too few goods. That the public can understand.

Recent experience makes this clear. Between 2020 and 2022, the Federal Reserve grew M2 money supply by approximately 40 percent, while real GDP increased by only 5 percent, creating a massive imbalance between money and output. Inflation was an inevitable result.

The charter of the Federal Reserve should be revised to require steady money supply growth, which will result in stable prices.

Individual price fluctuations versus general inflation

It is important to distinguish between relative price changes and inflation. Individual prices constantly move up and down based on supply and demand. Energy prices fall with new supply. Agricultural prices spike after poor harvests. Technology prices often decline over time. These movements are signals of supply and demand, not of general inflation. General inflation is when nearly all prices rise together because the value of money itself is falling.

A useful contrast to our recent experience is the period from the late 1980s through the mid-2000s under Federal Reserve Chairman Alan Greenspan. During that era, money supply growth was materially steadier and more closely aligned with real economic growth. The result was low, predictable inflation that averaged roughly two to three percent for nearly two decades. While the Greenspan period was not without excesses, it demonstrated that disciplined monetary expansion can anchor prices over long stretches of time.

The distorted public debate

Ignorant of these monetary principles, the public debate focuses on individual price movements (driven by supply and demand) and creates scapegoats for each of them. Kamala Harris blamed “price gougers” for high food prices. Donald Trump blamed Biden administration spending. Others blame large corporations.

Presidential campaigns routinely promise to “lower prices.” These promises are structurally empty. The executive branch does not set monetary policy, does not control the Federal Reserve’s balance sheet, and does not determine money supply growth. Fiscal policy can potentially influence demand at the margins, but only the central bank controls the quantity of money. Suggesting otherwise misleads voters and weakens public understanding of economic governance.

Like roosters believing they make the sun rise, political leaders often claim credit or accept blame for outcomes they do not control.

Restoring clarity about institutional responsibility is essential. Without it, inflation becomes a partisan talking point rather than a solvable policy problem.

A balance sheet at a dangerous scale

The Federal Reserve’s balance sheet expanded dramatically during and after the pandemic, rising from under $4 trillion in 2019 to nearly $9 trillion by 2022. While some contraction has occurred, the balance sheet remains far above its pre-crisis trajectory. The reduction originally envisioned has proven politically and operationally difficult.

A permanently elevated balance sheet limits future crisis flexibility, distorts asset prices, encourages fiscal complacency, and blurs the line between monetary and fiscal policy. Large-scale asset purchases also entangle the central bank in credit allocation decisions that should remain outside its remit.

More importantly, a swollen balance sheet reinforces the perception that extraordinary monetary intervention is normal rather than exceptional. That expectation raises the probability that future shocks will again be met with excessive money creation, repeating the cycle that produced recent inflation.

Why unexpected inflation is so damaging

Inflation is not merely an increase in prices; it is a transfer of wealth.

When inflation is unexpected, it erodes purchasing power unevenly and arbitrarily. Households living on fixed incomes, wage earners whose pay lags prices, and savers holding cash or bonds bear the greatest cost. Borrowers and asset holders often benefit.

This asymmetry makes inflation socially corrosive. It undermines trust in institutions, distorts long-term planning, and penalizes prudence. Unlike transparent taxation, inflation operates without explicit consent and without legislative accountability. It is, in effect, a hidden tax — one levied without legislation or consent. If the value of your home rises due only to inflation, upon sale you will pay a capital gains tax on money you did not earn.

Stable prices are therefore not an abstract macroeconomic goal. They are a prerequisite for economic fairness, household security, and long-term growth.

Rules vs. discretion

Milton Friedman argued that monetary policy should be governed by clear rules rather than discretionary judgment. His concern was not theoretical elegance but institutional reliability. Even capable central bankers can make systematic errors, particularly when responding to political pressure or short-term crises.

Friedman consistently warned that granting wide discretion to monetary authorities would lead to episodic overexpansion followed by damaging corrections. His proposed remedy was simple: constrain money growth to a predictable rule tied to long-run economic capacity, rather than short-term judgment calls.

Rules-based policy constrains those errors. A requirement for steady, predictable money supply growth reduces the risk of overreaction, limits political influence, and anchors expectations. When households and businesses can trust that the value of money will be preserved, economic decision-making improves across the board.

The Federal Reserve has gradually moved away from explicit monetary rules toward broader discretion justified by evolving frameworks. The recent inflation episode illustrates the cost of that shift.

Simplify the Federal Reserve’s charter

Congress should revise the charter of the Federal Reserve to make price stability the primary and overriding objective, rather than co-equal with maximum employment. Employment outcomes are influenced by technology, demographics, education, regulation, and global competition. Monetary policy is a blunt instrument, ill-suited for managing any of them.

Price stability, by contrast, is squarely within the Federal Reserve’s control. When inflation is stable and predictable, labor markets function more effectively on their own. When inflation is unstable, employment gains are often temporary and followed by sharper corrections.

Elevating price stability is not anti-growth or anti-worker. It is pro-credibility. A central bank with a narrow, enforceable mandate is more likely to succeed than one asked to manage multiple, sometimes conflicting goals.

Conclusion

The recent inflation surge was not mysterious, unavoidable, or primarily political. It was the foreseeable result of excessive money creation combined with weak institutional constraints.

Strengthening regulatory control of the Federal Reserve, reestablishing rules-based monetary discipline, and making price stability the primary mandate are necessary steps to prevent a repeat.

Stable money is not a technocratic luxury. It is a foundation of economic trust. Rules, clarity, and institutional discipline are how we get it back.

Footnotes

1. Federal Reserve Bank of St. Louis (FRED). M2 Money Stock (M2SL) and Real Gross Domestic Product (GDPC1), 2020–2022. https://fred.stlouisfed.org/series/M2SL | https://fred.stlouisfed.org/series/GDPC1

2. Federal Reserve Bank of St. Louis (FRED). M2 Money Stock, comparison of growth rates during the Greenspan era (1987–2006) versus 2020–2022. https://fred.stlouisfed.org/graph/?g=1c4xV

3. Friedman, Milton. A Program for Monetary Stability. Fordham University Press, 1960; and Friedman, Milton, “The Role of Monetary Policy,” American Economic Review, 1968. https://www.jstor.org/stable/1831652