Money is a commodity, just like pork bellies, legal services, and software. So, like all commodities, money can go up or down in price, depending on supply and demand. But since money, by definition, is a commodity that is universally accepted in exchange for every other commodity, when the price of money goes down, the price of everything else goes up. We call that inflation.

When the money supply increases markedly, as it does in wartime when the government inevitably runs up huge deficits to finance the war, inflation is not far behind.

In the Civil War, prices in the North went up by about 75 percent over the four-year course of that conflict. (The inflation in the South was far worse: 700 percent in just the first two years of the war, severely disrupting the Southern economy. This was a substantial part of the reason the South lost the war.) Wage and price controls kept inflation in check during World War II, but as soon as they were lifted, prices soared.

The greatest peacetime inflation occurred in the 1970s when it hit an annual rate as high as 12 percent and the prime rate—the rate at which the most trusted borrowers borrow—hit a horrendous 20 percent in 1979. Inflation was only stopped when Paul Volcker, chairman of the Federal Reserve, induced a severe recession. Unemployment went as high as 10.2 percent.

Inflation has been modest for the last 40 years, but is it about to return? There are worrying signs that it is. Many prices have been rising swiftly. Gasoline was $1.98 a gallon a year ago. Today it is $3.05. Lumber and other building supplies have also substantially increased. Meat and food generally have also risen noticeably in price in recent months.

Generous—many have argued over-generous—unemployment benefits during the pandemic have accrued in people’s bank accounts or have been used to pay down credit card balances. For those who did not lose their jobs, spending on such things as eating out, dry cleaning, and transportation considerably decreased and much of that money has been banked. As the economy recovers, spending will grow faster than supply can be increased, sending up prices. Supply-line disruptions have already caused shortages in some commodities. Just visit a supermarket, and you’re likely to see a few empty shelves.

The federal government has been borrowing trillions at a rate unprecedented in peacetime. In 2009, the national debt was nearly $11 trillion, 81 percent of GDP. Today it is over $28 trillion, up 150 percent in only 12 years, and now equal to 127 percent of GDP. That’s just slightly below where it stood in 1946, at the end of the most expensive war in American history.

And the Federal Reserve has been buying up trillions of that debt, creating money in the process and so greatly increasing the money supply. Indeed, almost one-quarter of the money now in circulation has been created since January 2020.

It was precisely the combination of increased federal borrowing, and the accommodation of that borrowing by the Federal Reserve by keeping interest rates low, that triggered the inflation of the 1970s.

Between 2015 and 2020 annual inflation ranged between 2.5 and 3 percent. But last month, the Consumer Price Index shot up to 4.2 percent on an annual basis. The core personal consumption expenditures index inflation rate, which the Federal Reserve regards as the best measure of inflation, rose 3.1 percent year-over-year. That was higher than expected. If you include food and energy—both of which tend to be volatile—and the index rose 3.6 percent. The price of gold, a classic hedge against inflation, is up 11 percent from a year ago.

Inflation is a self-fulfilling prophecy. What drives it is the expectation of inflation. If people see prices rising, they begin to demand pay raises. As payroll costs go up, so do the prices of the products the company produces, and inflation spirals upward.

But it is Wall Street’s expectations that are the most important. Inflation erodes the value of debts that have fixed interest rates, such as most home mortgages. And so, creditors increase interest rates to protect themselves.

The beneficiaries of inflation, of course, are those in debt. Just consider the biggest debtor of all, the federal government. In the 1970s, the national debt rose 145 percent. But so great was the inflation in that decade that the debt actually declined as a percentage of GDP, from 39 percent to 34.5 percent.

Over the last 40 years, Wall Street has been confident that the Federal Reserve would do what was necessary to prevent a spiraling of inflation and so inflation was modest. There are signs that the Street is less confident now, given the Fed’s extended easy-money policies.

If that confidence continues to erode, then the rate of inflation will inevitably increase.

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