Why Everything Costs More: Your Econ 101 Inflation Explainer | This Week's Economy Ep. 142
A simple breakdown of inflation and the solutions that protect your wallet.
Hello Friends!
If you’ve felt like your paycheck doesn’t stretch as far as it used to, you’re not alone. Families across the country are finding that grocery prices, gas costs, and even utility bills are putting new strain on their wallets. It’s not just that prices are higher — it’s that the pace of the increases feels relentless.
Inflation isn’t an abstract economic term. It’s the frustration of working hard yet still feeling like you’re falling behind.
In today’s episode of This Week’s Economy, we’ll break down what’s really driving inflation, how the Federal Reserve is involved, and, most importantly, what can be done to fix it. When we understand the problem, we’re empowered to demand better solutions — ones that protect our paychecks, rebuild trust, and help every household breathe a little easier.
Tune in to the full episode on YouTube, Apple Podcast, or Spotify, and visit my website for more information.
Lesson 1: What is Inflation?
Quick Lesson:
The late, great economist Milton Friedman, who studied monetary policy and inflation for decades, explained it best:
“Inflation is always and everywhere a monetary phenomenon. It is a result of a greater increase in the quantity of money than in the output of goods and services which is available for spending.”
Inflation isn’t mysterious or random. It’s a manmade problem, primarily driven by the Federal Reserve creating too much money relative to economic output. These insights are longstanding in economic thought.
Real-World Examples:
Your grocery bill or gas fill-up has likely jumped substantially over the past few years.
Many workers saw pay increases — say, 7.5% — yet inflation rose just as much. Their real income didn’t rise at all.
Why It Matters:
Inflation acts like a tax, silently eroding purchasing power. Families and individuals suffer because their incomes no longer stretch as far as they used to.
It also damages social trust. Money facilitates voluntary exchange because people trust its value. When that trust erodes, trade becomes harder, and relationships across the economy strain.
Lesson 2: Can Inflation be Controlled?
Quick Lesson:
The government ultimately creates inflation because only the government (via the central bank) can create base money. Historically, governments have used inflation as a hidden tax when they cannot raise enough revenue transparently to cover spending.
Persistent inflation is not a mystery — it’s driven by the Federal Reserve’s management of the money supply. The Fed’s enormous $6.6 trillion balance sheet (see chart below), controlled by unelected officials, distorts credit markets, props up asset prices, and reduces the dollar's purchasing power.
Can taxes help with inflation? If taxes reduce the federal deficit — instead of the Fed financing deficit spending through money creation — then higher taxes can help reduce inflation. But the best solution is spending restraint.
As Milton Friedman put it plainly:
“What produces [inflation] is too much government spending and too much government creation of money and nothing else. ”
Real-World Examples:
The Fed’s balance sheet exploded during the COVID-19 pandemic. Combined with trillions in federal deficit spending, this surge in the money supply contributed to the inflationary spike as supply chains lagged behind demand.
The Fed’s “band-aid” policies — monetizing debt and manipulating interest rates — have masked deeper structural problems while raising the cost of living.
Why It Matters:
The Fed’s balance sheet still exerts a larger influence on the economy than the interest rate it sets. Until this unwinds, inflationary pressures persist. Cutting rates too soon risks fueling another wave of inflation. This calls for monetary discipline, not political convenience.
Lesson 3: How to Address Inflation
Quick Lesson:
The Fed controls “high-powered money” through the assets on its balance sheet (see chart above) — mostly Treasury securities, but also mortgage-backed securities, loans to financial institutions, and other assets (particularly after 2008’s quantitative easing era).
Large federal deficits give the Fed more debt to buy, expanding high-powered money and fueling inflation by creating more money relative to goods and services. Post-2008, the composition of the Fed’s balance sheet has become even more important in shaping credit conditions and inflation dynamics.
Real-World Examples:
When the Fed buys Treasury debt, the new money enters the economy unevenly, flowing first through financial markets before reaching households and small businesses. This staggered process — known as the Cantillon effect — benefits those closest to the money creation first.
In the 1970s, the Fed loosened monetary policy too soon, which helped drive a prolonged period of high inflation.
Why It Matters:
To restore stability and confidence, the U.S. needs binding fiscal and monetary rules grounded in sound economics. That includes:
Government spending that grows slower than population growth plus inflation
Money supply that grows only fast enough to keep prices stable
Monetary and fiscal discipline — not political maneuvering — is the path to lower inflation and a healthier economy.
4. APPLYING PRINCIPLES TODAY
The Federal Reserve:
The Fed’s premature interest-rate cuts in the late 1970s worsened inflation. They contributed to the economic instability that ultimately produced the double-dip recession of the early 1980s, driven by a sharp reduction in the money supply and hikes in interest rates by Fed Chairman Paul Volcker. With that history in mind, today’s environment warrants caution.
Rather than leaning on rate cuts, the Fed should focus on aggressively reducing its balance sheet. The rapid expansion of that balance sheet — and the surge in money creation throughout the pandemic — are major drivers of the inflation we face now. Meaningfully shrinking it to about 6% of GDP (currently 20% of GDP and 6% in 2008) would drain excess liquidity from the economy and curb inflation more effectively than interest-rate adjustments alone.
Congress:
Federal spending has surged since 2020, with the gross national debt climbing by nearly $13 trillion since 2019 to reach $38 trillion. When the government reallocates productive private resources toward politically driven programs, it weakens the economy’s capacity to produce goods and services, thereby tightening supply and driving up many prices.
To reduce uncertainty and correct these distortions, Washington needs binding fiscal and monetary rules rooted in sound economics rather than political expedience. That means limiting government spending growth to below population growth plus inflation and ensuring the money supply expands only enough to maintain stable prices. Together, these principles would create a more predictable, prosperous environment for families, workers, and businesses.
Final Thoughts
Inflation is the result of deliberate choices — choices about how much government spends, how much the Federal Reserve expands its balance sheet, and how much new money enters the economy. When Washington overspends and the Fed accommodates that spending with easy money, the value of the dollar erodes. But when policymakers follow sound principles, inflation can be controlled and even prevented. The key is discipline: keeping spending in check and maintaining a stable money supply that grows no faster than the economy’s ability to produce real goods and services.
Understanding these fundamentals is empowering. Families, workers, and voters often feel inflation is something that “just happens,” but it isn’t. Inflation is a policy outcome, which means we can change it. When leaders prioritize stable prices, limited government, and a money supply anchored to economic reality rather than political convenience, purchasing power is preserved and the economy thrives.
The path forward is clear: fiscal responsibility, monetary restraint, and a return to the basic principles that have consistently supported prosperity. A stable dollar is more than an economic goal — it’s foundational to trust, opportunity, and the long-term well-being of every American household.
RESOURCES
Here are some recommended resources to dive deeper into studying the topic:
Dollars and Deficits: Inflation, Monetary Policy and the Balance of Payments by Milton Friedman
Inflation by Lawrence H. White on EconLib
How Money Supply Drives Inflation by Marginal Revolution University
Milton Friedman - Only Government Creates Inflation
Why Governments Create Inflation by Marginal Revolution University
Prof. Antony Davies: 10 Myths About Inflation by Learn Liberty
What Is Inflation? by Prager U
Understanding Inflation and Consumer Price Index by Marginal Revolution University
Thanks for joining me in this week’s episode. For more resources and commentary, visit VanceGinn.com and subscribe to my Substack at vanceginn.substack.com. God Bless You! Let People Prosper!
