The Fed Is All Wrong About Inflation

In contrast, productivity improvements in the machines that make goods are relatively easy. The Middle Ages, for instance, had its own "Industrial Revolution" when water power was applied to jobs like washing and preparing cloth that had previously been done by hand. Makes you think twice about our current insistence on taking energy and food costs out of our most-watched measures of inflation.

Price waves begin as demand inflation increases the prices for food, fuel, land and shelter. In all price waves until the 20th century, population growth led to that increase in demand. In the 20th century, rising consumer incomes and expectations produce the same effect.

Production costs: Cost-push forces add to inflation, especially in food production, as higher prices encourage farmers to bring marginal, less-productive land into use. That produces more food, true, but at a higher cost, which leads to higher prices as the costs are pushed along to consumers.

Money supply: An increase in the money supply kicks in to drive inflation higher after the initial demand-based inflation has set prices in motion. Governments typically attempt to combat rising prices by increasing the amount of money in circulation. That, of course, just adds speed to price increases. This is true even in the 20th and 21st centuries, where central banks may try to fight cyclical inflation by raising interest rates or slowing growth in the money supply, but where the economy as a whole keeps creating new money in the form of looser credit requirements or no-down-payment mortgages.

The advantage of wealth: In the first half of a price wave, the wealthy are able to stay ahead of inflation by demanding tax cuts as they did in the run-up to the French Revolution, increasing rents on their property, demanding subsidies from government and using the power of the government and the courts to force increasingly impoverished wage-earners to pay their debts.

Wage-earners, on the other hand, lose ground steadily to prices. And to taxes. Governments, facing their own debt crises as prices rise, attempt to raise taxes. But those taxes aren't distributed equally among the population, since the wealthy use their political clout to get themselves exempted from the tax increases.