The Surprising Truth Behind Inflation That Nobody Wants You To Know

I know you’re probably sick of hearing about inflation. The talking heads on TV blame greedy corporations. Politicians point fingers at each other. And your uncle rants on Facebook about government money printing.

Everyone has an opinion, but nobody seems to really understand why prices keep going up.

That’s because the root cause of inflation is counterintuitive. It challenges the conventional wisdom drilled into us by textbooks and economics professors.

But once you see the surprising truth, so much finally makes sense.

Why the Standard Explanation Falls Short

The typical explanation is that inflation is caused by too much money chasing too few goods.

It sounds reasonable enough: If there’s more money around to buy stuff, sellers can charge higher prices. More money, higher prices. Basic supply and demand.

When you look closer, this logic falls apart like a cheap lawn chair.

Over the last decade, the Federal Reserve created trillions of new dollars through quantitative easing to fight the Great Recession. The money supply exploded higher.

Yet inflation stayed low.

Clearly more money doesn’t always mean higher inflation. There’s something deeper going on.

The Real Root Cause of Inflation

The hidden truth about inflation is that at its core, it’s a behavioural phenomenon, not a monetary one. Prices rise when people and businesses expect inflation to rise.

It’s one big self-fulfilling prophecy. A collective delusion that feeds on itself.

When people think inflation is taking off, they act accordingly:

Workers demand bigger raises to offset higher living costs.

Companies hike prices to cover higher labour costs.

Investors charge more interest on loans to beat expected inflation.

These actions, in turn, make the inflation expectations come true.

It’s a vicious feedback loop that creates higher inflation, regardless of the money supply or any other factor.

The 1970s Inflation Spiral

This behavioural concept explains the runaway inflation of the 1970s perfectly.

Back then, people witnessed rising prices year after year. Inflation was all over the news. Everyone braced for more inflation ahead.

Workers negotiated cost-of-living adjustments into their contracts, automatically raising wages to match price increases.

Businesses built future inflation into their pricing decisions.

Lenders jacked up interest rates to stay ahead of inflation expectations.

At one point, inflation hit 14% as people acted as if double-digit inflation was inevitable — and it became a self-fulfilling prophecy.

Not because of loose monetary policy. Not because of an overheated economy. But because people expected inflation, and those expectations drove reality.

How To Tame Inflation Expectations

If inflation is a behavioural issue, monetary policy isn’t the solution. Controlling the money supply treats the symptom, not the disease.

The only way to conquer high inflation is to change expectations. To break the self-reinforcing cycle of ever-rising prices.

That’s why Paul Volcker, Federal Reserve Chairman during the 1980s, made taming inflation expectations his top priority.

He didn’t care about tanking the economy or spiking unemployment with sky-high interest rates. Fixing expectations was paramount.

Once he convinced people that inflation would fall, it did. The cycle reversed as everyone adjusted their behaviour accordingly.

Instead of chasing runaway inflation, workers, businesses, and investors planned for lower inflation ahead. And those lower expectations became reality.

The Surprising Truth Matters

Understanding the true behavioural nature of inflation is crucial.

It means obsessing over money supply figures is wasted energy. The Fed creating a few trillion dollars out of thin air isn’t automatically inflationary.

It also means the inflation genie won’t go back in the bottle until expectations change, no matter how much the Fed raises rates.

The good news is expectations can change swiftly when people finally realize that inflation isn’t an unstoppable force of nature, but a collective story we tell ourselves.

As Volcker showed, the inflation narrative can shift rapidly from “prices always go up” to “higher prices won’t last” once people update their mental models.

So don’t listen to the talking heads or politicians. Forget what textbooks taught you. Inflation is a behavioural phenomenon with a psychological cure.

Now that you know the surprising truth behind inflation that the mainstream ignores, you can protect yourself instead of feeling confused and powerless.

© Buzzedison

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