Tom_Spangler (Forum Supporter) said:
Is it your contention that the only way to counter inflation is by limiting prices in some way, government action or other?
No, as I said earlier, inflation is not really about prices. Inflation is about *money*, specifically the amount of it that is floating around in the economy.
Just like everything else in the world, money is affected by the laws of supply and demand. For example, if you hold demand for bananas constant but increase the supply, the value (and thus the price) for each individual banana drops, right? The same thing happens with money, if you increase the number of dollars out there then the value of each individual dollar drops. Dollars don't really have a direct price of their own (at least, not unless you look at international exchange rates), so the way this manifests is that the price of everything else goes up as measured in dollars.
And that's what inflation is. More money in the economy -> dollars are worth less than they used to be -> price of everything goes up. If inflation happened perfectly evenly across the board it would be harmless, just imagine that all of a sudden every price has an extra zero at the end. Bananas cost ten times what they used to, cars cost ten times what they used to, but your salary is ten times what it used to be and so is your bank balance. That would be a "zero-sum game".
But it doesn't happen evenly, instead what happens is that the government creates more money out of thin air and spends it on something. Bombers, military salaries, canceling student loan debt, or just "stimulus checks", it doesn't matter. The government has more money, they spend it on something, and now that money is out in the economy. It takes a while for the effects to be felt and to trickle out, but if you wait long enough then all prices change as a result as the system settles down and adjusts to the larger supply. Some parties in the economy benefit from this, such as people who have loans with fixed interest rates who can now pay them back using dollars that are worth less than the ones they borrowed. In contrast, some parties are hurt by it, such as people living on fixed incomes.
Measuring the money supply is hard, because it's not just about how many pieces of paper there are with green ink printed on them. Loans don't increase the amount of physical money, but they have similar (but somewhat smaller per dollar) effect on the supply. There are economic formulas for various "types" of money, but fundamentally this is difficult to use. So instead of measuring the supply, we measure it indirectly by monitoring prices with the Consumer Price Index. That's what underlies news reports about "inflation" and why everyone thinks it's about prices when really it's about money.
Anyway, that's a long and roundabout way of saying that if you want to control inflation with a fiat currency you need to do it by controlling the money supply. The best way to do that is to not let it get out of control in the first place, but our government was acting like a teenager who'd just gotten his first credit card during Covid. Once we're in this situation there are a few tools that US government has for doing this, but the main one is to have the Federal Reserve raise interest rates (see previous comment about money types).
Another way of controlling it is not to have a fiat currency -- at one point money was gold, and the only way to increase the supply of that was to go dig more of it out of the ground. That happened, obviously, but is said to be slightly different to fiat currency inflation for reasons that I'm not really sure about.
Price controls, by contrast, do not work. Prices are set by supply and demand of the good and the money being exchanged for that good, and forcing prices to be held below the natural market point just creates a shortage.
