Editing Inflation (section)

== Causes ==
{{Organize section|date=February 2024}}

=== Historical approaches ===

Theories of the origin and causes of inflation have existed since at least the 16th century. Two competing theories, the [[quantity theory of money]] and the [[real bills doctrine]], appeared in various guises during century-long debates on recommended central bank behaviour. In the 20th century, [[Keynesian]], [[monetarist]] and [[New classical macroeconomics|new classical]] (also known as [[rational expectations]]) views on inflation dominated post-World War II [[macroeconomics]] discussions, which were often heated intellectual debates, until some kind of synthesis of the various theories was reached by the end of the century.

==== Before 1936 ====
{{main|Real bills doctrine}}

The [[price revolution]] from ca. 1550–1700 caused several thinkers to present what is now considered to be early formulations of the [[quantity theory of money]] (QTM). Other contemporary authors attributed rising price levels to the debasement of national coinages. Later research has shown that also growing output of [[Central Europe]]an silver mines and an increase in the [[velocity of money]] because of innovations in the payment technology, in particular the increased use of [[bill of exchange|bills of exchange]], contributed to the price revolution.<ref name=Dimand>{{cite book|last1=Dimand |first1=Robert W. |chapter=Monetary Economics, History of |title=The New Palgrave Dictionary of Economics |date=2016 |pages=1–13 |doi=10.1057/978-1-349-95121-5_2721-1 |chapter-url=https://link.springer.com/referenceworkentry/10.1057/978-1-349-95121-5_2721-1 |publisher=Palgrave Macmillan UK |isbn=978-1-349-95121-5 |language=en}}</ref>

An alternative theory, the [[real bills doctrine]] (RBD), originated in the 17th and 18th century, receiving its first authoritative exposition in [[Adam Smith]]'s ''[[The Wealth of Nations]]''.<ref>{{cite journal |last1=Green |first1=Roy |title=Real Bills Doctrine |journal=The New Palgrave Dictionary of Economics |date=2018 |pages=11328–11330 |doi=10.1057/978-1-349-95189-5_1614|isbn=978-1-349-95188-8 }}</ref> It asserts that banks should issue their money in exchange for short-term real bills of adequate value. As long as banks only issue a dollar in exchange for assets worth at least a dollar, the issuing bank's assets will naturally move in step with its issuance of money, and the money will hold its value. Should the bank fail to get or maintain assets of adequate value, then the bank's money will lose value, just as any financial security will lose value if its asset backing diminishes. The real bills doctrine (also known as the backing theory) thus asserts that inflation results when money outruns its issuer's assets. The quantity theory of money, in contrast, claims that inflation results when money outruns the economy's production of goods.

During the 19th century, three different schools debated these questions: The [[British Currency School]] upheld a quantity theory view, believing that the [[Bank of England]]'s issues of bank notes should vary one-for-one with the bank's gold reserves. In contrast to this, the [[British Banking School]] followed the real bills doctrine, recommending that the bank's operations should be governed by the needs of trade: Banks should be able to issue currency against bills of trading, i.e. "real bills" that they buy from merchants. A third group, the Free Banking School, held that competitive private banks would not overissue, even though a monopolist central bank could be believed to do it.<ref>{{cite journal |last1=Schwartz |first1=Anna J. |title=Banking School, Currency School, Free Banking School |journal=The New Palgrave Dictionary of Economics |date=2018 |pages=694–700 |doi=10.1057/978-1-349-95189-5_263|isbn=978-1-349-95188-8 }}</ref>

The debate between currency, or quantity theory, and banking schools during the 19th century prefigures current questions about the credibility of money in the present. In the 19th century, the banking schools had greater influence in policy in the United States and Great Britain, while the [[British Currency School|currency schools]] had more influence "on the continent", that is in non-British countries, particularly in the [[Latin Monetary Union]] and the [[Scandinavian Monetary Union]].

During the Bullionist Controversy during the [[Napoleonic Wars]], [[David Ricardo]] argued that the Bank of England had engaged in over-issue of bank notes, leading to commodity price increases. In the late 19th century, supporters of the quantity theory of money led by [[Irving Fisher]] debated with supporters of [[bimetallism]]. Later, [[Knut Wicksell]] sought to explain price movements as the result of real shocks rather than movements in money supply, resounding statements from the real bills doctrine.<ref name=Dimand/>

In 2019, monetary historians [[Thomas M. Humphrey]] and [[Richard Timberlake]] published "Gold, the Real Bills Doctrine, and the Fed: Sources of Monetary Disorder 1922–1938".<ref>{{cite book |last1=Humphrey |first1=Thomas M. |last2=Timberlake |first2=Richard H. |title=Gold, the Real Bills Doctrine, and the Fed : sources of monetary disorder 1922–1938 |date=2019 |publisher=Cato Institute |location=Washington, D.C. |isbn=978-1-948647-13-7 |edition=First}}</ref>

==== Keynes and the early Keynesians ====
{{further|Keynesian Revolution}}
{{further|Keynes's theory of wages and prices}}
John Maynard Keynes in his 1936 main work ''[[The General Theory of Employment, Interest and Money]]'' emphasized that wages and prices were [[Nominal rigidity|sticky]] in the short run, but gradually responded to [[aggregate demand]] shocks. These could arise from many different sources, e.g. autonomous movements in investment or fluctuations in private wealth or interest rates.<ref name=parkin/> Economic policy could also affect demand, [[monetary policy]] by affecting interest rates and [[fiscal policy]] either directly through the level of [[government final consumption expenditure]] or indirectly by changing [[Disposable and discretionary income|disposable income]] via tax changes.

The various sources of variations in aggregate demand will cause cycles in both output and price levels. Initially, a demand change will primarily affect output because of the price stickiness, but eventually prices and wages will adjust to reflect the change in demand. Consequently, movements in real output and prices will be positively, but not strongly, correlated.<ref name=parkin/>

Keynes' propositions formed the basis of [[Keynesian economics]] which came to dominate macroeconomic research and economic policy in the first decades after World War II.<ref name=Blanchard/>{{rp|526}} Other Keynesian economists developed and reformed several of Keynes' ideas. Importantly, [[William Phillips (economist)|Alban William Phillips]] in 1958 published indirect evidence of a negative relation between inflation and unemployment, confirming the Keynesian emphasis on a positive correlation between increases in real output (normally accompanied by a fall in unemployment) and rising prices, i.e. inflation. Phillips' findings were confirmed by other empirical analyses and became known as a [[Phillips curve]]. It quickly became central to macroeconomic thinking, apparently offering a stable trade-off between [[price stability]] and employment. The curve was interpreted to imply that a country could achieve low unemployment if it were willing to tolerate a higher inflation rate or vice versa.<ref name=Blanchard/>{{rp|173}}

The Phillips curve model described the U.S. experience well in the 1960s, but failed to describe the [[1973–75 recession|stagflation experienced in the 1970s]].

==== Monetarism ====
[[File:CPI 1914-2022.webp|thumb|alt=CPI 1914–2022|upright=1.8|
{{legend|#0076BA |Inflation}}
{{legend|#EE220C |[[Deflation]]}}
{{legend-line|#1DB100 solid 3px|[[Money supply|M2 money supply]] increases Year/Year}}
]]
[[File:M2 and Inflation USA.svg|thumb|right|upright=2.4|Inflation and the growth of money supply (M2)]]
{{Further|Monetarism}}

During the 1960s the Keynesian view of inflation and macroeconomic policy altogether were challenged by [[Monetarism|monetarist]] theories, led by [[Milton Friedman]].<ref name=Blanchard/>{{rp|528–529}} Friedman famously stated that ''"Inflation is always and everywhere a monetary phenomenon."''<ref>{{cite book|first1=Milton|last1= Friedman|first2=Anna Jacobson |last2=Schwartz|title=A Monetary History of the United States, 1867–1960|url=https://archive.org/details/monetaryhistoryo00frie|url-access=registration|year=1963|publisher=Princeton University Press}}</ref> He revived the [[quantity theory of money]] by [[Irving Fisher]] and others, making it into a central tenet of monetarist thinking, arguing that the most significant factor influencing inflation or deflation is how fast the [[money supply]] grows or shrinks.<ref name="Lagassé2000">{{cite book |author=Lagassé, Paul |title=The Columbia Encyclopedia |publisher=Columbia University Press |location=New York |year=2000 |chapter=Monetarism |isbn=0-7876-5015-3 |edition=6th |url-access=registration |url=https://archive.org/details/columbiaencyclop00laga }}</ref>

The quantity theory of money, simply stated, says that any change in the amount of money in a system will change the price level. This theory begins with the [[equation of exchange]]:

:<math>MV = PQ,</math>
where
:<math>M</math> is the nominal quantity of money;
:<math>V</math> is the [[velocity of money]] in final expenditures;
:<math>P</math> is the general price level;
:<math>Q</math> is an index of the [[real versus nominal value (economics)|real value]] of final expenditures.

In this formula, the general price level is related to the level of real economic activity (''Q''), the quantity of money (''M'') and the velocity of money (''V''). The formula itself is simply an uncontroversial [[accounting identity]] because the velocity of money (''V'') is defined residually from the equation to be the ratio of final nominal expenditure (<math> PQ </math>) to the quantity of money (''M'').<ref name=Mankiw2002/>{{rp|81–107}}

Monetarists assumed additionally that the velocity of money is unaffected by monetary policy (at least in the long run), that the real value of output is also [[exogenous]] in the long run, its long-run value being determined independently by the productive capacity of the economy, and that money supply is exogenous and can be controlled by the monetary authorities. Under these assumptions, the primary driver of the change in the general price level is changes in the quantity of money.<ref name=Mankiw2002/>{{rp|81–107}} Consequently, monetarists contended that monetary policy, not fiscal policy, was the most potent instrument to influence aggregate demand, real output and eventually inflation. This was contrary to Keynesian thinking which in principle recognized a role for monetary policy, but in practice believed that the effect from interest rate changes to the real economy was slight, making monetary policy an ineffective instrument, preferring fiscal policy.<ref name=Blanchard/>{{rp|528}} Conversely, monetarists considered fiscal policy, or government spending and taxation, as ineffective in controlling inflation.<ref name="Lagassé2000"/>

Friedman also took issue with the traditional Keynesian view concerning the Phillips curve. He, together with [[Edmund Phelps]], contended that the trade-off between inflation and unemployment implied by the Phillips curve was only temporary, but not permanent. If politicians tried to exploit it, it would eventually disappear because higher inflation would over time be built into the economic expectations of households and firms.<ref name=Blanchard/>{{rp|528–529}} This line of thinking led to the concept of [[potential output]] (sometimes called the "natural gross domestic product"), a level of GDP where the economy is stable in the sense that inflation will neither decrease nor increase. This level may itself change over time when institutional or natural constraints change. It corresponds to the Non-Accelerating Inflation Rate of Unemployment, [[NAIRU]], or the "natural" rate of unemployment (sometimes called the "structural" level of unemployment).<ref name=Blanchard/> If GDP exceeds its potential (and unemployment consequently is below the NAIRU), the theory says that inflation will ''accelerate'' as suppliers increase their prices. If GDP falls below its potential level (and unemployment is above the NAIRU), inflation will ''decelerate'' as suppliers attempt to fill excess capacity, cutting prices and undermining inflation.<ref>{{cite journal | last = Coe | first = David T. | title = Nominal Wages. The NAIRU and Wage Flexibility | publisher = Organisation for Economic Co-operation and Development (OECD) | url = http://www.oecd.org/dataoecd/59/19/33917832.pdf | year = 1985 | id = MPRA Paper 114295 | journal = OECD Economic Studies | issue = 5 | pages = 87–126 | s2cid = 18879396 | access-date = February 24, 2010 | archive-date = February 26, 2018 | archive-url = https://web.archive.org/web/20180226211933/http://www.oecd.org/dataoecd/59/19/33917832.pdf | url-status = live }}</ref>

==== Rational expectations theory ====

{{Further|Rational expectations}}

In the early 1970s, [[rational expectations theory]] led by economists like [[Robert Lucas Jr.|Robert Lucas]], [[Thomas J. Sargent|Thomas Sargent]] and [[Robert Barro]] transformed macroeconomic thinking radically. They held that economic actors look rationally into the future when trying to maximize their well-being, and do not respond solely to immediate [[opportunity cost]]s and pressures.<ref name=Blanchard/>{{rp|529–530}} In this view, future expectations and strategies are important for inflation as well. One implication was that agents would anticipate the likely behaviour of central banks and base their own actions on these expectations. A central bank having a reputation of being "soft" on inflation will generate high inflation expectations, which again will be self-fulfilling when all agents build expectations of future high inflation into their nominal contracts like wage agreements. On the other hand, if the central bank has a reputation of being "tough" on inflation, then such a policy announcement will be believed and inflationary expectations will come down rapidly, thus allowing inflation itself to come down rapidly with minimal economic disruption. The implication is that [[credibility]] becomes very important for central banks in fighting inflation.<ref name=Blanchard/>{{rp|467–469}}

==== New Keynesians ====

Events during the 1970s proved Milton Friedman and other critics of the traditional Phillips curve right: The relation between the inflation rate and the unemployment rate broke down. Eventually, a consensus was established that the break-down was due to agents changing their inflation expectations, confirming Friedman's theory. As a consequence, the notion of a [[natural rate of unemployment]] (alternatively called the structural rate of unemployment) was accepted by most economists, meaning that there is a specific level of unemployment that is compatible with stable inflation. [[Stabilization policy]] must therefore try to steer economic activity so that the actual unemployment rate converges towards that level.<ref name=Blanchard/>{{rp|176–189}} The trade-off between the [[unemployment rate]] and inflation implied by Phillips thus holds in the short term, but not in the long term.<ref>Chang, R. (1997) [https://www.frbatlanta.org/filelegacydocs/ACFC7.pdf "Is Low Unemployment Inflationary?"] {{webarchive|url=https://web.archive.org/web/20131113212953/https://www.frbatlanta.org/filelegacydocs/ACFC7.pdf|date=November 13, 2013}} ''Federal Reserve Bank of Atlanta Economic Review'' 1Q97: 4–13.</ref> Also the [[1970s energy crisis|oil crises of the 1970s]] causing at the same time rising unemployment and rising inflation (i.e. [[stagflation]]) led to a broad recognition by economists that [[supply shock]]s could independently affect inflation.<ref name=parkin/><ref name=Blanchard/>{{rp|529}}

During the 1980s a group of researchers named [[New Keynesian economics|new Keynesians]] emerged who accepted many originally non-Keynesian concepts like the importance of monetary policy, the existence of a natural level of unemployment and the incorporation of rational expectations formation as a reasonable benchmark. At the same time they believed, like Keynes did, that various [[market imperfection]]s in different markets like labour markets and financial markets were also important to study to understand both inflation generation and [[business cycle]]s.<ref name=Blanchard/>{{rp|533–534}} During the 1980s and 1990s, there were often heated intellectual debates between new Keynesians and new classicals, but by the 2000s, a synthesis gradually emerged. The result has been called the ''new Keynesian model'',<ref name=Blanchard/>{{rp|535}} the "[[new neoclassical synthesis]]"<ref name=Goodfriend>{{cite journal |last1=Goodfriend |first1=Marvin |title=How the World Achieved Consensus on Monetary Policy |journal=Journal of Economic Perspectives |date=1 November 2007 |volume=21 |issue=4 |pages=47–68 |doi=10.1257/jep.21.4.47|s2cid=56338417 |doi-access=free }}</ref><ref>{{cite journal |last1=Woodford |first1=Michael |title=Convergence in Macroeconomics: Elements of the New Synthesis |journal=American Economic Journal: Macroeconomics |date=1 January 2009 |volume=1 |issue=1 |pages=267–279 |doi=10.1257/mac.1.1.267}}</ref> or simply the "new consensus" model.<ref name=Goodfriend/>

=== View post-2000 to present ===
{{See also|Economic analysis of climate change|Housing shortage}}

A common view beginning around the year 2000 and holding through to the present time on inflation and its causes can be illustrated by a modern Phillips curve including a role for supply shocks and inflation expectations beside the original role of aggregate demand (determining employment and unemployment fluctuations) in influencing the inflation rate.<ref name=Blanchard/> Consequently, demand shocks, supply shocks and inflation expectations are all potentially important determinants of inflation,<ref name=congress/> confirming the basis of the older [[triangle model]] by [[Robert J. Gordon]]:<ref>Robert J. Gordon (1988), ''Macroeconomics: Theory and Policy'', 2nd ed., Chap. 22.4, 'Modern theories of inflation'. McGraw-Hill.</ref>

* ''Demand shocks'' may both decrease and increase inflation. So-called [[demand-pull inflation]] may be caused by increases in aggregate demand due to increased private and government spending,<ref>{{cite web |last1=Gillespie |first1=Nick |last2=Taylor |first2=Regan |title=Biden Is Clueless About Inflation |url=https://reason.com/video/2022/04/01/biden-is-clueless-about-inflation/ |website=reason.com |date=April 2022 |publisher=Reason |access-date=4 April 2022 |archive-date=April 27, 2022 |archive-url=https://web.archive.org/web/20220427225435/https://reason.com/video/2022/04/01/biden-is-clueless-about-inflation/ |url-status=live }}</ref><ref>{{cite web |last1=De Rugy |first1=Veronique |title=Blame Insane Government Spending for Inflation |url=https://reason.com/2022/03/31/blame-insane-government-spending-for-inflation/ |website=reason.com |date=March 31, 2022 |publisher=Reason |access-date=4 April 2022 |archive-date=May 11, 2022 |archive-url=https://web.archive.org/web/20220511170305/https://reason.com/2022/03/31/blame-insane-government-spending-for-inflation/ |url-status=live }}</ref> etc. Conversely, negative demand shocks may be caused by [[contractionary]] economic policy. 
* ''Supply shocks'' may also lead to both higher or lower inflation, depending on the character of the shock. [[Cost-push inflation]] is caused by a drop in aggregate supply (potential output). This may be due to natural disasters, war or increased prices of inputs. For example, a sudden decrease in the supply of oil, leading to increased oil prices, can cause cost-push inflation. Producers for whom oil is a part of their costs could then pass this on to consumers in the form of increased prices.<ref name=Britannica>{{cite web|url=https://www.britannica.com/EBchecked/topic/287700/inflation/3512/The-cost-push-theory|title=Encyclopædia Britannica|access-date=September 13, 2014|archive-date=September 7, 2014|archive-url=https://web.archive.org/web/20140907030214/http://www.britannica.com/EBchecked/topic/287700/inflation/3512/The-cost-push-theory/|url-status=live}}</ref> 
* ''Inflation expectations'' play a major role in forming actual inflation. High inflation can prompt employees to demand rapid wage increases to keep up with consumer prices. In this way, rising wages in turn can help fuel inflation as firms pass these higher labor costs on to their customers as higher prices, leading to a feedback loop. In the case of collective bargaining, wage growth may be set as a function of inflationary expectations, which will be higher when inflation is high. This can cause a [[wage-price spiral]]. In a sense, inflation begets further inflationary expectations, which beget further [[built-in inflation|(built-in) inflation]].<ref name=Britannica/>

The important role of rational expectations is recognized by the emphasis on credibility on the part of central banks and other [[policy-makers]].<ref name=Goodfriend/> The monetarist assertion that monetary policy alone could successfully control inflation formed part of the new consensus which recognized that both monetary and fiscal policy are important tools for influencing aggregate demand.<ref name=Goodfriend/><ref name=Blanchard/>{{rp|528}} Indeed, monetary policy is under normal circumstances considered to be the preferable instrument to contain inflation.<ref name=congress>{{cite web |title=Inflation in the U.S. Economy: Causes and Policy Options |url=https://crsreports.congress.gov/product/pdf/R/R47273/2 |website=crsreports.congress.gov |publisher=Congressional Research Service |access-date=15 October 2023 |date=October 6, 2022}}</ref><ref name=Blanchard/> At the same time, most central banks have abandoned trying to target money growth as originally advocated by the monetarists. Instead, most central banks in developed countries focus on adjusting interest rates to achieve an explicit inflation target.<ref name=Romer/><ref name=Blanchard/>{{rp|505–509}} The reason for central bank reluctance in following money growth targets is that the money stock measures that central banks can control tightly, e.g. the [[monetary base]], are not very closely linked to aggregate demand, whereas conversely money supply measures like [[M2 (economics)|M2]], which are in some cases more closely correlated with aggregate demand, are difficult to control for the central bank. Also, in many countries the relationship between aggregate demand and all money stock measures have broken down in recent decades, weakening further the case for monetary policy rules focusing on the money supply.<ref name=Romer/>{{rp|608}}

However, while more disputed in the 1970s, surveys of members of the [[American Economic Association]] (AEA) since the 1990s have shown that most professional American economists generally agree with the statement "Inflation is caused primarily by too much growth in the money supply", while the same surveys have shown a lack of consensus by AEA members since the 1990s that "In the short run, a reduction in unemployment causes the rate of inflation to increase" has developed despite more agreement with the statement in the 1970s.{{refn|name=EconomistsConsensus|<ref>{{cite journal|last1=Kearl|first1=J. R.|last2=Pope|first2=Clayne L.|last3=Whiting|first3=Gordon C.|last4=Wimmer|first4=Larry T.|year=1979|title=A Confusion of Economists?|journal=American Economic Review|publisher=American Economic Association|volume=69|issue=2|pages=28–37|jstor=1801612}}</ref><ref>{{Cite journal |last1=Alston |first1=Richard M. |last2=Kearl |first2=J.R.|author-link2=James R. Kearl |last3=Vaughan |first3=Michael B. |title=Is There a Consensus Among Economists in the 1990's? |date=May 1992 |journal=[[The American Economic Review]] |volume=82 |issue=2 |pages=203–209 |jstor=2117401 |url=http://www.weber.edu/wsuimages/AcademicAffairs/ProvostItems/global.pdf}}</ref><ref>{{Cite journal |last1=Fuller |first1=Dan |last2=Geide-Stevenson |first2=Doris |title=Consensus Among Economists: Revisited |date=Fall 2003 |journal=[[Journal of Economic Education|The Journal of Economic Education]] |volume=34 |issue=4 |pages=369–387 |jstor=30042564 |doi=10.1080/00220480309595230|s2cid=143617926 }}</ref><ref>{{cite journal|last1=Fuller|first1=Dan|last2=Geide-Stevenson|first2=Doris|title=Consensus Among Economists – An Update|year=2014|journal=[[Journal of Economic Education|The Journal of Economic Education]]|publisher=[[Taylor & Francis]]|volume=45|issue=2|page=138|doi=10.1080/00220485.2014.889963|s2cid=143794347|url=https://www.researchgate.net/publication/261884738}}</ref><ref>{{cite journal|last1=Geide-Stevenson|first1=Doris|last2=La Parra-Perez|first2=Alvaro|year=2024|title=Consensus among economists 2020—A sharpening of the picture|journal=[[Journal of Economic Education]]|publisher=[[Taylor & Francis]]|volume=55|issue=4|pages=461–478|doi=10.1080/00220485.2024.2386328}}</ref>}}

[[2021–2023 inflation surge#Housing shortage|Housing shortages]]<ref>{{Cite news |last=Derby |first=Michael S. |date=September 27, 2022 |title=Fed's Harker says housing shortage a key inflation driver |url=https://www.reuters.com/markets/us/feds-harker-says-housing-shortage-key-inflation-driver-2022-09-27/ |work=Reuters}}</ref><ref>{{Cite news |last1=O'Donnell |first1=Katy |last2=Guida |first2=Victoria |date=November 10, 2021 |title=Biden's next inflation threat: The rent is too damn high |url=https://www.politico.com/news/2021/11/10/rent-inflation-biden-520642 |work=Politico |quote=Housing costs just posted one of their largest monthly gains in decades, and many economists expect them to loom large in inflation figures over the next year heading into the 2022 midterm elections. It's not just economists — the Federal Reserve Bank of New York said in research released Monday that Americans on average expect rents to rise 10.1 percent over the next year, the highest reading in the survey's history.}}</ref><ref>{{Cite web |last=Boak |first=Josh |date=2024-03-15 |title=Why are so many voters frustrated by the US economy? It's home prices |url=https://apnews.com/article/biden-inflation-housing-trump-home-price-rent-248ef02e197c3a7ffb801e370c529d33 |access-date=2024-07-24 |website=AP News |language=en |quote=}}</ref><ref>{{Cite news |last=O'Donnell |first=Katy |date=March 18, 2022 |title=The main driver of inflation isn't what you think it is |url=https://www.politico.com/news/2022/03/18/housing-costs-inflation-00015808 |work=Politico |quote=But when it comes to the single biggest driver of runaway prices, Washington's hands are mostly tied. Skyrocketing housing costs may create even bigger problems for the administration going forward than oil and food price spikes, which are the result of sudden and unforeseen — but probably temporary — events. That's because there's no clear end in sight for shelter inflation.}}</ref> and [[2021–2023 inflation surge#Climate change|climate change]]<ref>{{Cite web |last=Borenstein |first=Seth |date=2024-03-21 |title=Higher temperatures mean higher food and other prices. A new study links climate shocks to inflation |url=https://apnews.com/article/inflation-climate-change-food-prices-heat-6e5297e12868aaf797529bb755268818 |access-date=2024-07-24 |website=AP News |language=en}}</ref><ref>{{Cite news |date=July 23, 2024 |title=Home insurance rates are rising due to climate change. What could break that cycle? |url=https://www.npr.org/2024/07/18/1198912918/home-insurance-rates-are-rising-due-to-climate-change-what-could-break-that-cycl |work=NPR}}</ref><ref>{{Cite web |last=Becker |first=William S. |date=2024-07-22 |title=Opinion: Climate inflation is eating your paycheck — and it's only going to get worse |url=https://thehill.com/opinion/energy-environment/4782252-climate-inflation-economic-impact/ |access-date=2024-07-24 |website=The Hill |language=en-US}}</ref><ref>{{Cite web |date=July 11, 2024 |title=How is climate change affecting food prices and inflation? |url=https://www.aljazeera.com/program/inside-story/2024/7/11/how-is-climate-change-affecting-food-prices-and-inflation |access-date=2024-07-24 |website=Al Jazeera |language=en}}</ref> have both been cited as significant drivers of inflation in the 21st century.

==== 2021–2022 inflation spike ====

{{main|2021–2022 inflation spike}}

In 2021–2022, most countries experienced a considerable [[2021–2023 inflation surge|increase in inflation]], peaking in 2022 and declining in 2023. The causes are believed to be a mixture of demand and supply shocks, whereas inflation expectations generally seem to remain anchored (as per May 2023).<ref name="Brookings">{{cite web |last1=Bernanke |first1=Ben |last2=Blanchard |first2=Olivier |title=What Caused the U.S. Pandemic-Era Inflation? |url=https://www.brookings.edu/wp-content/uploads/2023/04/Bernanke-Blanchard-conference-draft_5.23.23.pdf |website=www.brookings.edu |publisher=Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution |access-date=15 October 2023 |date=May 23, 2023}}</ref> Possible causes on the demand side include expansionary fiscal and monetary policy in the wake of the global [[COVID-19 pandemic]], whereas supply shocks include [[supply chain]] problems also caused by the pandemic<ref name="Brookings" /> and exacerbated by energy price rises following the [[Russian invasion of Ukraine]] in 2022. 

The term [[sellers' inflation]] was coined during this period to describe the effect of corporate profits as a possible cause of inflation: Price inelasticity can contribute to inflation when [[Consolidation (business)|firms consolidate]], tending to support monopoly or [[monopsony]] conditions anywhere along the [[supply chain]] for goods or services. When this occurs, firms can provide greater [[shareholder value]] by taking a larger proportion of [[Profit (accounting)|profits]] than by investing in providing greater volumes of their outputs.<ref>{{cite book |last1=Mankiw |first1=N. Gregory |title=Principles of economics |date=2015 |publisher=[[Cengage Learning]] |isbn=978-1285165875 |edition=Seventh |location=Stamford, Connecticut |pages=257–367 |language=en-us |chapter=Part V, chapters 13–17}}</ref><ref>{{cite web |last1=Bivins |first1=Josh |title=Corporate profits have contributed disproportionately to inflation. How should policymakers respond? |url=https://www.epi.org/blog/corporate-profits-have-contributed-disproportionately-to-inflation-how-should-policymakers-respond/ |website=Economic Policy Institute |access-date=25 May 2022 |date=21 April 2022 |archive-date=May 25, 2022 |archive-url=https://web.archive.org/web/20220525111507/https://www.epi.org/blog/corporate-profits-have-contributed-disproportionately-to-inflation-how-should-policymakers-respond/ |url-status=live }}</ref> Shortly after initial energy price shocks caused by the Russian invasion of Ukraine had subsided, oil companies found that supply chain constrictions, already exacerbated by the ongoing global pandemic, supported price inelasticity, i.e., they began lowering prices to match the [[price of oil]] when it fell much more slowly than they had increased their prices when costs rose.<ref>{{cite news |last1=Cronin |first1=Brittany |date=7 May 2022 |title=The good times are rolling for Big Oil. 3 things to know about their surging profits |url=https://www.npr.org/2022/05/07/1097177459/big-oil-exxon-earnings-gasoline-prices-crude |url-status=live |archive-url=https://web.archive.org/web/20220521123900/https://www.npr.org/2022/05/07/1097177459/big-oil-exxon-earnings-gasoline-prices-crude |archive-date=May 21, 2022 |access-date=25 May 2022 |work=NPR |language=en}}</ref>

The [[quantity theory of money]] has long been popular with [[libertarian-conservative]] critics of the Federal Reserve. During the COVID pandemic and its immediate aftermath, the M2 money supply increased at the fastest rate in decades, leading some to link the growth to the 2021-2023 inflation surge. Fed chairman [[Jerome Powell]] said in December 2021 that the once-strong link between the money supply and inflation "ended about 40 years ago," due to financial innovations and deregulation. Previous Fed chairs [[Ben Bernanke]] and [[Alan Greenspan]], had previously concurred with this position. The broadest measure of money supply, M3, increased about 45% from 2010 through 2015, far faster than GDP growth, yet the inflation rate declined during that period — the opposite of what monetarism would have predicted. A lower [[velocity of money]] than was historically the case<ref>{{cite news |title=Velocity of M2 Money Stock |url=https://fred.stlouisfed.org/series/M2V |publisher=[[Federal Reserve Bank of St. Louis]]}}</ref> was also cited for a diminished effect of growth in the money supply on inflation.<ref>{{cite news |last1=Hanke |first1=Steve H. |last2=John Greenwood |title=Inflation Was Always a Monetary Phenomenon, Never Transitory |url=https://www.nationalreview.com/2024/01/inflation-was-always-a-monetary-phenomenon-never-transitory/ |work=[[National Review]] |date=January 15, 2024}}</ref><ref>{{cite news |last1=Lynch |first1=David J. |title=Inflation has Fed critics pointing to spike in money supply |url=https://www.washingtonpost.com/business/2022/02/06/federal-reserve-inflation-money-supply/ |newspaper=[[The Washington Post]] |date=February 6, 2022}}</ref>

===Heterodox views===

Additionally, there are theories about inflation accepted by economists outside of the [[mainstream economics|mainstream]]. The [[Austrian School]] stresses that inflation is not uniform over all assets, goods, and services. Inflation depends on differences in markets and on where newly created money and credit enter the economy. [[Ludwig von Mises]] said that inflation should refer to an increase in the quantity of money, that is not offset by a corresponding increase in the need for money, and that price inflation will necessarily follow, always leaving a poorer nation.<ref>{{cite web |last1=Mises |first1=Ludwig von |title=Human Action |url=https://oll.libertyfund.org/quote/ludwig-von-mises-lays-out-five-fundamental-truths-of-monetary-expansion-1949 |website=OLL |access-date=July 17, 2021 |archive-date=September 25, 2021 |archive-url=https://web.archive.org/web/20210925084337/https://oll.libertyfund.org/quote/ludwig-von-mises-lays-out-five-fundamental-truths-of-monetary-expansion-1949 |url-status=live }}</ref><ref>{{cite book|last=Von Mises|first=Ludwig|title=The Theory of Money and Credit|year=1912|publisher=Yale University Press|page=240|url=https://mises.org/books/tmc.pdf |archive-url=https://ghostarchive.org/archive/20221009/https://mises.org/books/tmc.pdf |archive-date=2022-10-09 |url-status=live|edition=1953|access-date=January 23, 2014|quote=In theoretical investigation there is only one meaning that can rationally be attached to the expression Inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the demand for money (again in the broader sense of the term), so that a fall in the objective exchange-value of money must occur.}}</ref><ref>The Theory of Money and Credit, Mises (1912, [1981]), p. 272.</ref>