(This item originally appeared at Forbes.com on September 11, 2026.)
What is “inflation”?
No, seriously, what is it?
In our 2022 book, Inflation: What It Is, Why It’s Bad, and How To Fix It, we literally put “what it is” right on the cover, in the title, because we knew that people didn’t know what it is.
We were anticipating a deluge of discussion about “inflation”, which happened much as we expected as the official CPI hit +8.98% YoY in June 2022. We expected that even after millions of words on the topic, people still wouldn’t know what “inflation” is. We were right. They still don’t.
Most people spend too much time on TikTok. But there are some people, who really are very talented, and really spend hours per day discussing big macro topics including “inflation,” and have been doing so for years and decades. This includes people like Federal Reserve Governor Kevin Warsh, who used to work for bigfoot hedge fund manager Stanley Druckenmiller – who is not only really good, but has been called “The Greatest Macro Investor Of All Time.” So you better believe that Kevin Warsh is also pretty darn good, because otherwise Druckenmiller would have fired him. Although we have a “competence crisis” these days, with people in positions of importance who really shouldn’t be there, this has not been true (yet) at the Federal Reserve. Kevin Warsh is not only competent, but super-competent. It would be difficult for me to name anyone anywhere who brings to the table such a combination of intellectual power, leadership, and real-world experience.
I don’t think Kevin Warsh knows what “inflation” is.
The hedge fund manager Harris Kupperman, who, like Warsh, has spent decades following the issue of “inflation,” with access to a huge amount of material from top Wall Street economists and strategists, and who actually pays attention to what the people at the Federal Reserve say, recently drew a line under all this, and asked: “What Is Inflation??” Yes, there are two question marks, because not only does he not know the answer, after all this — he really doesn’t know.
In our book, we made it as simple as we could.
Prices go up and down for all kinds of reasons.
You can divide these into two basic categories, “monetary” reasons, and “non-monetary” reasons.
“Non-monetary” reasons are all the things that might influence prices (individually, or broadly as measured by some official CPI statistic), even if the currency was stable in value. Basically, this is Supply and Demand for individual goods and services. There might be some kind of unusual Supply issue, a “shortage” of some sort. There might be some kind of Demand issue, in an individual good or service, or even broadly, or “aggregate demand” as the Keynesians call it, common in recession. Plain economic growth in general tends to drive prices higher. Singapore has higher prices than Guatemala. Manhattan has higher prices than Flushing, Queens. Thus, as a country becomes more wealthy, like Singapore, prices might rise. A recession, or even extended economic decline, might lead to lower prices.
None of this has anything to do with the currency. Mostly these things fix themselves – the solution to higher prices is higher prices – but sometimes there are real issues, which are probably resolved by “increasing supply” in some way, perhaps by reducing government restrictions on producers of goods and services.
If this sounds obvious, it’s because it is.
“Monetary” reasons are things that have to do with the currency alone, and have really nothing to do with supply and demand for goods and services.
This is basically a change in the value of a currency. If a currency’s value falls in half, we can expect that, “all else being equal” (it never is but that’s a good place to start), prices will double in response as markets adjust to the new value of the currency. This might take place immediately, as for the price of imported oil, or it might take years or even decades to flow through the price structure – perhaps for the price of domestic private K-12 schools.
In the book, we use the example of the Mexican peso, which was worth about 4/dollar in the mid-1990s and was later worth 20/dollar. In other words, the value of the peso fell from $0.25 to about $0.05.
You might find that the cost of your $5 Corona at the bar in Cancun rises from 20 pesos to 100 pesos – a 5x increase in nominal price. (The actual official CPI in Mexico rose 10x during this time, in part because the “$5 Corona” also rose from $3 to $6.)
Everybody understands this – especially Mexicans. It is simple and obvious. The price didn’t rise 5x because of a Corona Shortage. It is not a supply-and-demand issue for some individual item, within the context of a stable currency. It is simply a market reaction to a change in the value of the money.
In general, both “monetary” and “non-monetary” influences on individual prices, and on some official CPI as a whole, are operating at the same time. Sometimes they are working in the same direction, as when “supply chain” issues of genuine shortage compounded with monetary influences, in 2022. They might be working in opposite directions, as today when monetary influences toward higher prices (falling currency value) combine with what amounts to declining “demand” for the simple reason that wages haven’t kept up, so households are cutting back (not buying) some things. All of these influences together, combined with some statistical legerdemain and fakery, produce the official CPI.
Note that we focus on the Value of the Money – not “money supply,” according to whatever ”definition of the money supply” momentarily supports our arguments (economists constantly switch these around). It’s true that an expanding “money supply” might lead to a decline in currency value. This has happened many times in the past. But, it might also be true that “money supply” doesn’t really change in any meaningful way, but the currency’s value falls – a lot – anyway. This is more common than many people think.
Once we understand all the bad things that can happen due to a decline in currency value, naturally you would want to keep the value of the currency as stable as possible, to prevent such unpleasantness. This is a principle of economics going back literally thousands of years. The early economist David Ricardo, summing up centuries of discussion on the topic, concluded:
A currency, to be perfect, should be absolutely invariable in value.
Prices might still go up and down – a lot. The CPI would go up and down. But, these would be entirely “non-monetary” influences on prices, which would mostly take care of themselves.
This is what the United States actually did. Between the Coinage Act of 1792, and the devaluation of 1933, the US dollar did not suffer any significant and permanent loss of value compared to its benchmark, gold and silver. (There was a big inflation during the Civil War, which was remedied afterwards.) The result was that, although prices did go up and down for all kinds of “non-monetary” reasons, with prices for manufactured goods generally falling and wages generally rising, commodity prices were about the same in 1930 as they were in 1800.
See, it works. If you keep the value of the currency stable, there is no “monetary inflation.” We proved it.
