Contrary to some popular opinions, the core answer is not to be found in gasoline prices \u2013 they are merely a symptom.\u00a0 Localized shortages, likes those experienced with the Colonial Pipeline shutdown<\/a>, can drive prices up for a period of time but they can\u2019t effect every sector in the economy.\u00a0 But we don\u2019t have shortages of gasoline, we have a systemic rise in the price of gas nationwide that is not due to \u2018the rapacious greed\u2019 of oil companies<\/a>.\u00a0 And, given that the price of gasoline figures into the cost of most everything else, higher transportation costs do get passed onto the consumer and so rising gas prices do have a compounding effect, even if they are not the root cause.<\/p>\n The other popular answer that inflation is a direct result of government spending hits closer to the mark but doesn\u2019t quite get there either.\u00a0 Fox Business showed a graphic very similar to the one shown below marking the steps of inflation over the last 15 months in attempt to indict the Biden administration\u2019s \u2018reckless spending\u2019 as the culprit of high inflation.<\/p>\n The graphic is compelling (even though the box layout and connecting lines are bit confusing) but spending, in and of itself, cannot be the source of economy-wide inflation.<\/p>\n Excellent examples of counter-arguments are found each and every Christmas when some fad takes root and the latest \u2018hot toy\u2019 emerges.\u00a0 To be concrete, no one could have foreseen the intense demand that the Nintendo Wii would command when it came out during the fall of 2006.\u00a0 Each Wii became such a hot commodity that stores sold out and large resell market developed.\u00a0 People who had the financial wherewithal to spend small fortunes threw cash around, thereby driving the price up in advance of Christmas day.\u00a0 And yet, the economy as a whole didn\u2019t suffer inflation.\u00a0 Other, more modern, examples of \u2018runaway prices\u2019 include the Game Stop stock bump<\/a> and the Dr. Seuss scare<\/a> where prices of those commodities rose sharply but, nonetheless, did not trigger economy-wide inflation.<\/p>\n With that in hand, let\u2019s return to the Fox Business argument and unpack it a bit.\u00a0 If the graphic they provided seems to prove that government spending if the culprit but, as was just argued, spending itself can\u2019t be to blame, how can we square these two different points?\u00a0 The reconciliation lies in not what amount government spent or in what sectors of the economy that spending occurred but rather in how government acquired the money it spent.<\/p>\n When a given individual, household, or firm spends it either takes from its savings or it borrows from someone else\u2019s in order to pay for what it wants or needs.\u00a0 Government has a third option: it can simply print more money.\u00a0 In exercising this third option, government typically triggers systemic, economy-wide inflation.\u00a0 The following excerpt from a talk given Milton Friedman drives this point home.<\/p>\n![\"\"](\"https:\/\/commoncents.blogwyrm.com\/wp-content\/uploads\/2022\/06\/CC_06Jun_inflation_summary.png\")
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