Inflation in economic theory

Inflation in economic theory

Photo by Adi Goldstein on Unsplash

Alexander Barta, Jorim Gerrard, Jakob Steffen & Frieder Zaspel
Exploring Economics, 2021
Poziom: początkujący
Perspektywy: Marksistowska ekonomia polityczna, Ekonomia neoklasyczna, Inne, Postkeynesizm
Temat: macroeconomics, money & debt
Formularz: Tekst podstawowy

Exploring Economics Foundational Text

Explore Perspectives            More foundational texts

A foundational text introduces a paradigm, a school of thought, or a theory in a longer article. In our orientation section, you can learn about and compare ten different perspectives of Pluralist Economics in even more detail.

Inflation in economic theory

Authors: Alexander Barta, Jorim Gerrard, Jakob Steffen & Frieder Zaspel

What’s inflation? Why is it relevant? And is there an agreed theory about its roots and causes, or is it a contentious concept? That’s what this text is all about: We define what inflation actually means before we delve into the theoretical debate with an interdisciplinary and pluralist approach: What gives rise to it, what factors might influence it, and, consequently, what might be done about it?


It is one of the most relevant macroeconomic parameters, and as such the object of heated debate about its origins, dangers and potential remedies: inflation and its equally problematic cousin, deflation.

In its most basic definition, inflation simply means rising prices. No more. All the rest typically associated with the term - e.g., too much money sloshing around, too few workers available on the labour market (and thus, cynically, too ‘few’ people unemployed), paper money becoming ‘debased’, etc. - already are part of a specific outlook on inflation itself and ought to be separated from the mere statistic.

So: inflation denotes rising prices in general, i.e. over the whole economy. Just as deflation denotes falling prices. Hang on, isn’t the latter even a good thing? Aren’t there people saying that the ‘right kind of deflation’ is actually to be welcomed? And aren’t central banks in turn aiming for mild inflation to the tune of between one and two per cent? Well, that’s theory already again.

Alright, so what’s the point about inflation and deflation? The point is this: All those prices attached to goods and services are money prices (or, as economists say, nominal prices). They denote what has to be paid in money to buy those goods and services. But then, of course, you have to pay money in order to buy things. What’s so special about that triviality? Well, everything, at least in terms of economic theory.

Before we delve into the theoretical debate on inflation between different schools of economic thought, though, it is helpful to employ a primer by the renowned economic historian Adam Tooze (2021) on inflation to get a more precise grip on the definition of the term:

"In discussing inflation, economics abstracts from idiosyncratic shocks. Inflation is defined as a general upward pressure on all prices, independent of idiosyncratic supply shocks. Inflation, in this sense, is a macroeconomic, aggregate concept.

The truly common denominator of economic activity in market societies is money. Goods exchange for money. So, as a pressure acting on the prices of all goods, it is with regard to money that inflation is defined. Indeed, as Rebecca L. Sprang reminded us in a typically brilliant op ed, when the term “inflation” began to be used in an economic context in the 1860s and 1870s it referred first and foremost to the expansion in the currency, not the price changes that might result from that monetary expansion. It was the currency that was inflating, not prices."

In light of this observation, Tooze arrives at the following broad definition:

"Inflation can thus be defined as a shift in the terms of trade between (1) money and (2) goods, as experienced (3) by a particular group of people and (4) captured by a particular statistical apparatus.”

Finally, it is elementary to recognise that the very measurement of inflation, i.e. the determination of the basket of goods and services whose prices are taken into account as much as the very production of the statistic itself, is a selective, theory-driven and, indeed, political choice already - there is no such thing as ‘objective inflation’. Here again, Adam Tooze (2021) delivers a memorable clarification:

“Picking a statistical indicator is not just a matter of design - choice of basket etc. Statistical indicators have to be produced. Their production involves capital and labour. It involves technology. Mobilizing those resources and putting them to work involves the exercise of power. To extract the raw material of data involves the exercise of authority, by way of law or other types of persuasion or coercion.

Data are business. Data are political. And that is particularly pertinent in the case of inflation, because inflations are contentious. They generate winners and losers. That is why we care about inflation. Winners may not want to have their gains documented. Losers will want to documenting [sic.] their losses so as to seek redress. Inflation numbers are not merely descriptive. They are part of the political economy of the process they describe. When it comes to inflation there are, as Harold Garfinkel the great ethnomethodologist might have put it, good reasons for bad data."

And with that, we’re ready to get right into the theoretical debate. For a first overview of the factors driving inflation in the following different schools of thought, check out the following table:

School of thought

Money Supply

Capacity utilisation/ slack


Cost push (esp. wages)

Demand pull

Conflicting claims

Markup policies

Neoclassicism/ Monetarism








New Keynesian theory








Post- Keynesian theory








Modern Monetary Theory








Political economy








Sociological theory









(Neo-)classical theory/Monetarism

"Hyperinflation is looming - central banks are printing money like crazy" is a thesis often heard ever since the Financial Crisis. Many proponents of this thesis are influenced by classical monetarism. They blame rising prices on increases in the quantity of money caused by central banks. The theoretical concept behind this thinking is the Quantitative Theory of Money: Given a fixed quantity of goods determined by the real economy, an increased money supply cannot but raise prices. This is the direct result of the concept of “neutral money”: An economy is determined by the set of relative real prices unaffected by changes in the money supply, the latter only affecting aggregate nominal demand (see for this concepts and neoclassical/monetarist theory of inflation in general Anderegg 2007).

The related fundament on which all (neo-)classical macroeconomic thinking rests is Say’s Law: Every supply automatically creates its own demand. Markets organised by the imaginary Walrasian auctioneer always clear at certain real, relative prices, the market for labour included; any unemployment thus is completely voluntary, and money is merely there to ease transactions.

If these elements are taken together, it is easy to understand the mainstay of macroeconomic modelling among central banks and financial journalists alike: The Phillips Curve model (see e.g. Mankiw 2019). In this model, a systematic inverse relationship between unemployment and inflation is postulated, i.e. if unemployment is high, inflation is low and vice versa. That is, the amount of labour employed gets determined by structural drivers on the labour market, real wages first and foremost among them. This labour input, then, determines real output in the economy. If unemployment is high and, thus, the amount of employed labour is low, additional production can be accomodated simply by taking on new workers, so that there is no need for prices to rise: By increasing employment, additional supply creates its own demand, leaving Say’s Law intact. But towards the level of maximum employment, i.e. with an unemployment rate reaching its lower boundary (see the following section on New Keynesian theory in general and the discussion of the Non-Accelerating Inflation Rate of Unemployment or NAIRU in particular), the economy bumps against its maximum productive capacity, so that any additional demand cannot be satisfied by more real production; instead, prices begin to rise to bring nominal production and demand into balance.

This is the Phelbs-Friedman theory of inflation: By simply raising the supply of money and/or debt-financed fiscal spending, the resulting additional demand will merely create inflation in the longer run, because the underlying equilibrium on the labour market determined by the real wage rate is left completely unaffected. In the worst of worlds with prices exogenously fixed by, e.g. structural inflexibility on the labour market such as minimum wages, a restricted supply creates slack in the economy while demand remains high or is additionally pushed by deficit spending and/or expansive monetary policy, creating 1970s-style stagflation, i.e. a combination of weak economic growth and high inflation.

There is still so much to discover!

In the Discover section we have collected hundreds of videos, texts and podcasts on economic topics. You can also suggest material yourself!

Discover material            Suggest material

Inflation, by contrast to Post-Keynesian theory in particular (see below) will never follow from just one or the other input factor price rising because that simply leads to a recalibration of the system of relative prices by the Walrasian Auctioneer, but not to a rise in the general price level. That is, something like a cost-push inflation resulting from an oil-price shock is unthinkable in neoclassical theory: By contrast, that shock will simply result in less demand for energy-intensive goods, pivoting resources towards non-energy-intensive goods, and the market clears again. At the same general price level.

Hence, the (neo-)classical school of thought has no explanation for the phenomenon of inflation other than money; in the famous words of Milton Friedman (1970), the godfather of Monetarism:

“Inflation is always and everywhere a monetary phenomenon.”

In this model of the world, labour will only ever get paid its marginal value product, i.e. its marginal real product times the price of that product. Since there is atomistic competition, no worker (or trade union) will be able to demand more for a prolonged period of time. Hence, wages, too, cannot be the drivers of inflation as they are determined by real variables on the labour market.

New Keynesian theory

Often seen as a misnomer, at least from the perspective of Post-Keynesian economists (see below), today’s New Keynesian mainstream school of thought in economics is the product of the so-called new neoclassical synthesis (see Blanchard 1991; for New Keynesian Theory in general, see e.g. Mankiw 2019). That synthesis has combined the (neo-)classical model of the world as described above with certain elements of John Maynard Keynes’s economic theory. In particular, Keynes’s stipulation that nominal wages and prices are often sticky due to political/technical reasons (think trade unions, menu costs etc.) is integrated into the neoclassical model (something completely alien to (neo-)classical thought due to its assumption of atomistic competition). Thus, any ‘excess’ amount of money injected by the central bank will lead to inflation if and only if that money is used by either the private sector or the state to buy goods and services. If, by contrast, it either gets stashed away in bank balances or the state refuses to implement additional fiscal spending, the additional money pumps up financial assets instead (not the ‘high-powered’ central bank money directly since these so-called reserves are restricted to banks’ accounts at the central bank, never flowing into the economy in general, but the additional credit these reserves allow to be created in the banking sector). Voilà, ‘asset price inflation’, the kind of which we have been witnessing ever since the Great Financial Crisis in 2008.

Ceteris paribus (all things equal), price shocks from, say, environmental disasters, oil crises etc. eventually peter out, and prices revert to the long-run equilibrium. So short-term, those shocks might effect inflation, but not long-term. That’s because economic agents have rational expectations: They see through the short-term shock and correct their expectations for that temporary effect.

Directly associated with the concept of rational expectations is the so-called Goodhart’s Law, named after Charles Goodhart who wrote in the 1970s that the moment any economic aggregate is targeted as a policy instrument (for example the inflation rate itself), it ceases to be a valid gauge of economic theory. Imagine the central bank trying to guarantee a specific rate of inflation. Economic agents then anticipate the central bank’s policy and behave accordingly when inflation starts to divert from the central bank’s target. In other words, the supposedly neutral metric of inflation becomes warped by its being dragged into the centre of attention (physicists might think of Werner Heisenberg’s uncertainty principle here).

Lasting inflation pressure, in this model of the world, might only come from a completely drained labour market, i.e. where employers compete in a bidding war for the few workers left. In this labour bottleneck scenario, the factor cost of the one basic input besides capital climbs and climbs, trickling through to each and every price in the economy. Remember that this is only possible because labour gets paid more than its marginal value product as stipulated by (neo-)classical thought; indeed, the latter could not even accept the notion of a bidding war for labour since the remuneration of workers is determined not by the relative scarcity of labour but by its contribution to production which by the model’s definition shrinks the more labour is employed already.

Hence, there always must be some ‘natural unemployment’, or, in more modern terms, a Non-Accelerating Inflation Rate of Unemployment (NAIRU): If unemployment turns out higher than the NAIRU for a prolonged period of time, prices will tend to fall, as there is no competition for labour and the bargaining power of workers is weak. If by contrast unemployment rests below the NAIRU longer than short-term, inflation will ensue inevitably.

Post-Keynesian theory

By contrast to the (neo-)classical and New Keynesian models of the world, in Post-Keynesian thought, there is not one, stable macroeconomic equilibrium (if any, for that matter). Specifically, there is no guarantee that the most fleeting of macroeconomic dreams, an equilibrium ensuring full employment will obtain any other way than by sheer coincidence. This instantly shatters Say’s Law as introduced in the section on the (neo-)classical school of thought above: If a stable equilibrium is not guaranteed and markets do not necessarily clear at all times, additional supply does not automatically generate its own demand (for Post-Keynesian theory in general see Arestis 1996).

One of the reasons for that is the very fiat money ignored by (neo-)classical thought as supposedly neutral. Fiat money enables households and firms to stash away purchasing power for later, thus obliterating Say’s Law already. Specifically, the demand for money in times of particular economic uncertainty (what Keynes called “liquidity preference”) creates a shortfall of effective real demand, because money is no product that can be grown by workers on trees or digged out of a mine pit, but is created at a pen’s stroke by central and commercial banks. As Keynes (1936) himself put it:

„Money in its significant attributes is, above all, a subtle device for linking the present to the future; and we cannot even begin to discuss the effect of changing expectations on current activities except in monetary terms.“ (ch. 21, I)

That renders the concept of a NAIRU, the bedrock of New Keynesian inflation theory, obsolete: If there is no long-run macroeconomic equilibrium, a stable relationship between unemployment and inflation included, it makes no sense to hold unemployment on a certain level to ensure there is no inflation (e.g., Galbraith 1997).

Nominal wages are not determined by the marginal value product of labour, but are a matter of relative economic power as distributed between (tacitly) organised employers on the one side and trade unions (with or without the assistance of minimum wages, decreed by the state) on the other. Specifically, nominal wages are not the result of a bargaining process on any labour market (which from this school of thought’s point of view is a purely theoretical figment anyway): They are negotiated for ex post, that is after firms’ determination of production plans, on the basis of the relative bargaining power distribution and/or firms’ objective to hold on to their most valued workers (cue Joseph Stiglitz’s ‘efficiency wages’ (Stiglitz 1974). In other words, firms determine their labour demand dependent on their expected sales or intended workers’ incentives, and then go on to haggle with worker associations or high-skilled workers individually over their contracts. That gives nominal or, as Keynes called them, “money” wages rather than real wages paramount importance for the expectations forming process and, thus, inflation, with the key insight that those money wages are not the endogenous result of an imaginary ‘labour market’ but exogenously given by factors outside of the market mechanism (see Keynes 1936, ch. 19).

In this model of the world, inflation almost never is the result of ‘too much money’ or ‘too low unemployment’. Rather, money is endogenous to the economy: It is created according to the demand by economic agents (in the terms of the Quantity Theory of Money introduced in the section on (neo-)classical thinking: The nominal amount of real goods and services times the price level stipulates the volume of money in the economy, not the other way round). Inflation, then, is primarily the result of economic agents’ expectations, and particularly their expectations about the development of nominal wages thrown off kilter by any shock big enough to do so. And that’s because economic agents typically don’t have rational expectations in the neoclassical meaning of the term: People do not compute new information with perfect foresight, but are fully aware of an inherently uncertain future impenetrable to forecasts. By contrast, then, to New Keynesian theory, those shocks do not necessarily peter out, with the economy reverting to its long-run mean (because to Post-Keynesians, there is no such long-run mean): Instead, their effects linger in the system, pushing nominal wages and other input factor prices and, hence, the general price level up and down, and potentially in a very destabilising, self-sustaining spiral at that, depending on the nature of the shock at hand (something called ‘hysteresis’).

Another Post-Keynesian take on inflation actually building on the insight discussed above that, rather than any fictitious labour market, it is relative economic power determining the level of wages is the so-called conflicting claims approach. This concept is rooted in the works of Michal Kalecki and others identifying inflation as the manifestation of conflicting claims of workers and firms in a situation when aggregated claims exceed national income; the intensity of inflation, then, is seen as being determined by the intensity of those struggles over income shares and thus the amount by which the sum of demanded income shares exceeds national income (Isaac 1999). As a matter of fact, this Post-Keynesian branch of thought in inflation owes much to political economy perspectives on the matter (see below).

Finally, there is the so-called wage-cost markup approach, a model developed by Sidney Weintraub (1978). This model highlights the growth of wages in relation to labour productivity as the main determinant of inflation. Rather unusual within the Post-Keynesian school of thought (and somewhat nearer to the New Keynesian mainstream), it recommends income policies and/or a sufficiently large supply of ‘reserve labour’ to control the growth rate of wages so as to ensure wage moderation and thus to avoid wage growth exceeding advances in labour productivity. That is, wage inflation, and thereby price inflation, should best be kept in check through the use of restrictive aggregate demand policies - at the cost of higher unemployment, slower growth in advanced economies and restricted growth prospects in developing economies (Atesoglu 1999).

Modern Monetary Theory

The approach of Modern Monetary Theory (MMT) is largely similar to that of Post-Keynesian theory, with the crucial difference that MMT does not deem expectations to be a relevant factor for inflation at all; instead, this school focusses on the conflicting claims between workers and capital owners, too, as well as on resource prices (energy first and foremost among them), market power, and exchange rates. With respect to its consideration of the struggle between labour and capital owners, it even bears some similarities to Marxian Political Economy (see below; for MMT in general see Mitchell 2021, Ehnts 2014).

From the point of view of MMT, money necessarily cannot be the driving force behind inflation, because in this school of thought, too, money is completely endogenous and thus cannot be pressed into the economy in excess of demand: Money supply follows money demand, both public and private. Consequently, MMT just like Post-Keynesian theory regards inflation/deflation as a real phenomenon: A rise/fall of the general price level is the result of imbalanced goods and services markets, never of ‘too much money’.

In this context, MMT sees fiscal spending as an important driver as much as a controlling instrument of inflation: If the government by dint of its issuing legal tender creates effective real demand up and above the available real supply of goods and services, prices rise across the board accordingly. Hence, fiscal policy, not monetary policy becomes the main instrument to control inflation, but in an ex-ante sense (Wray 2015, Kelton 2022): When private market forces seem to be creating inflationary pressure, primarily through exuberant wage growth for whatever reason, taxes should rise to forestall that inflationary pressure. When the economy threatens to fall into a deflationary spiral through mass defaults on private debt, taxes have to fall to counteract that spiral, etc. Note the ex-ante operationalisation here: It is no good for the government to raise/reduce fiscal stimuli after inflation/deflation have taken hold (that is, ex post), for that tends to amplify rather than smooth out the business cycle: With its effects often realised months later only, government policy can never be implemented ad hoc, so that it often acts pro-cyclically when the economy has moved into another state already.

Basically, MMT agrees with the specific Post-Keynesian take of inflation as the result of conflicting claims between labour and capital (see above; Hoefgen 2020): Both sides strive to gain the biggest possible share from production, but this struggle is subject much more to political than economic power. Quite apart from the economic underlying factors such as the marginal value product of labour/capital, either side will be able to secure more than its ‘adequate’ share on a regular basis, with the other trying to gain at least as much, so that total nominal claims are in excess of total nominal production, necessitating prices to rise.

Political Economy perspectives

Within Political Economy there are likewise diverse "schools" or "thought directions" of which a small selection will be introduced more closely. There is thus not a single political economic approach to serve as an explanation for inflation or the single theory of inflation, but a variety of positions that represent partly conflicting views on inflation or regard inflation as a phenomenon on different layers of analysis.

Modern/New Political Economy

From a modern/new political economy perspective, the state is being endowed with a central role "as an egoistic rent-seeking maximizer" that seeks to solve distributional conflict within its sphere of influence through inflation as a tool to “help the government [...] increasing its wealth and [there-]by affecting its ability to stay in power” (Kirshner 2001, p. 44). In this view — which grew out of conclusions of the neoclassical consensus, or processes elements of the public choice approach — institutions being designed to de-politicise monetary policy are regarded as beneficial. With formally independent central banks grabbing centre stage since 2008, several of their programmes such as quantitative easing (the purchase primarily of government bonds with newly created central bank money) can be seen as monetary financing of states: 50% of all government bonds issued by the UK government since the onset of the Covid pandemic have been directly bought by the Bank of England (compared with the time before the Financial Crisis when it held practically none), while in the Eurozone the share of government bonds bought on the secondary market by the ECB increased in the same time to 70% (Wullweber 2021).

Stay tuned!

Subscribe to our automatic content newsletter to never miss any new posts!


Marxist Political Economy

Marxian political economy perspectives focus on structural developments with regard to inflation and arrive at various explanations for the phenomenon.

Hung & Thompson (2016), for instance, propose the thesis that the rise and fall of inflation results rather from the distribution of power between labour and capital than from monetary and fiscal policies: Neoliberal repression and the disempowerment of labour kept inflation low from 1980s onward creating rising inequality and massive economic imbalances fuelling the financial boom until the Financial Crisis. Hence they tend to see a re-empowering of labour as a remedy to such imbalances and, hence, the deflationary pressure building up over the past decades.

Another view in the Marxian tradition postulates similarly to the "conflicting claims" approach discussed in the context of Post-Keynesian theory or MMT that inflation is the result of a dispute over wealth. Such a dispute is thought possible only when there is a difference in relative power with regard to control over the surplus value created:

"inflation disrupts the whole convention of credibility created socially around the general equivalent [... and] occurs when the relevant or organized (large companies) agents with different degrees of economic power try to take ownership of a larger part of the surplus value created socially[: ...] it is the perception of power over the market, which leads the large company to raise its prices" (Sawaya 2013).

When large corporations within the capitalist mode of production are in search for maximal profits, they will be trying to enforce the highest possible prices for their products and services. The utilisation of their pricing power is seen as the mechanism to increase their profitability with negative effects for the demand side, as private or other commercial buyers get relatively poorer in the process. Inflation is therefore not only the debasement of money and the creeping loss of purchasing power but mainly a question of market power (or powerlessness) and the distribution of produced wealth.

Following the lines of Karl Marx’s thought as outlined in the first chapters of his magnum opus Das Kapital, Hardcastle (1974) connects inflation to the convertibility of money. Rising prices indicate “an over-issue of inconvertible paper money”, i.e. the depreciation of currency: "if a general price rise had not been caused by currency depreciation its 'cost' and 'demand' symptoms would also not be there; which is not to say that individual and general price rises cannot happen for causes other than inflation". As such are the "cost-push or wage-push" and "demand-pull" approaches to inflation criticised “to explain [inflation] in terms of its symptoms not its cause". Inflation then is thought instead to be caused by those “who control the note issue”. Interestingly, this line of thought is closely related to (neo-)classical economics’ take on inflation and especially the quantity theory of money (see above), which is no coincidence: Karl Marx accepted and elaborated on much of the theoretical work by his classical forebear David Ricardo.

French Régulation theory

Analyses of the French Régulation school build upon the Marxist school of thought and develop it further or adapt it to the historical developments of the general conditions. One representative of Régulation theory puts forth the argument that the process of exchange involves within the scope of Marx' theory of the "value form" a transformation of substance (i.e. social abstract labour) from its value form to a money form, a transformation of utmost importance to Marx's macroeconomic theory:

"social production is organized as the sum of activities of 'private' units operating independently of one another. The socialization of private labor takes the form of an exchange of products, entailing in itself, two aspects: (1) the transfer of use-values between owners according to relative values, perhaps 'transformed' by other social relations, such as the equalization of profits, formation of rents, etc. [Lipietz, 1979b; 1982]; and (2) the confirmation by this means of the social validity of each private unit of labor" (Lipietz 1982, p. 50, added emphasis).

In a way, money serves as a general equivalent (again a concept from classical economics; think of the term “numéraire”, a mainstay in monetary theory) as long as “universal labor expended anywhere within the social division of labor” is prevalidated in the sense that it is representative of a certain “buying power” (Lipietz 1982, p. 51). The preservation of purchase power has changed profoundly by the generalisation of credit money since the collapse of Bretton Woods (this is where a link between Marx and the Post-Keynesians is, again, established: The notion of saved purchasing power drained from economic circulation is the reason why Say’s Law becomes violated, see above).

Hence an “adjustment problem” was identified inherent in the capitalist mode of production. In the case of a commodity money, i.e. where money takes the form of a metal or any other real resource with inner economic value such as grain, that adjustment is supposed to occur automatically: Gold as the exemplary, scarce commodity money then acts as a limitation on the attempts of “capitalists” to charge ever higher prices. In the case of credit money, by contrast, the adjustment will be global:

“The effect of the intertemporal connections on the system of nominal prices is felt in two ways. In the case of commodity money, an ounce of gold always possesses the same price. Prices will therefore decline, in order that they be re-aligned with the internal relations. In the case of credit money, on the other hand, the monetary income of the two social classes is defined in nominal terms—so much per month for workers, and a given annual rate of return on capital. It follows, therefore, that prices will increase at a rate of inflation equal to the difference between the real rate of profit and the nominal rate." (Lipietz 1982, p. 55).

With the issuance of credit corresponding to the demand of productive capital, credit money has thus become endogenous to the economic system which is limited only by banks' estimates of opportunities open for the use of credit on the part of their clients (Lipietz 1982). Credit money, then, is being validated ex ante by private banks and eventually pseudo-validated on par by policies of central banks interested in maintaining adequate liquidity levels in essential market segments and in controlling the risk of inflation.

Critical Political Economy

A key insight from a critical political economy perspective relates to the problem that there might be a perpetual structural gap between purchasing power and the price of goods and services outstanding in the market or encoded in the pricing mechanism itself (Douglas, 1931). As businesses form the price of their goods and services depending on the sum of the costs of input factors (land, labour, capital) and depending on the competitiveness of their respective market in which they operate, they factor in a markup for their entrepreneurship and thus try to charge "what the traffic will bear" (Veblen, 1923, p. 85). Since most businesses put this pricing mechanism into practice (aiming for maximal profitability), the gap is partially overcome by (commercial) bank credit (Di Muzio & Noble, 2017). Modern capitalism is hence founded on the structural necessity of credit and debt that provide the means of settlement in the first place and are responsible for the cost-plus system of pricing (ibid.). Another problem is the circumstance that "there is always more debt in the system than there is the ability to repay the debt" as during the creation of money through the origination of loans banks "create the principal, never the interest" (ibid., p. 101). Interest on money/debt is understood as a key driver of differential inflation (meaning that there is a natural variance between businesses in terms of indebtedness ratio, their costs of production and eventually their offered interest level), as interest gets passed on to consumers (= interest inflation and markup or profit inflation, ibid., p. 103f). On the assumption that most businesses do not finance themselves on retained earnings alone, business debt continues to grow with interest payments being also a significant factor in pushing up prices.

From a critical political economy perspective, the periodic crises of overproduction or underconsumption arising from the intertemporality of debt financing might be occurring since the "ever-lengthening chains of payment" and the means of settlement of due debt, i.e. the optimal maturity transformation into the future, due to the perpetual structural gap and the lack of purchasing power in the economy outlined previously, have been exhausted. This is usually the time when central banks are called upon in their function as dealers and lenders of last resort. The periods of growth building up to such crises are comprehended as involving system-inherent pathways of uneven development, including distributional advantages for capital-intensive investments that arise from capital's structural dominance vis-à-vis wage labour dependent income as well as from the privilege of money creation itself involving in fact the creation of the principle but not the interest (see above). Marxian inspired research points to the relatively uneven consequences of inflation: Less affluent households are being primarily affected by rising prices in light of having to stem rising monthly living expenses on relatively sticky wages, while the more affluent and particularly high net worth individuals exhibit a huge tendency to save and invest their income in assets such as real estate, stocks and corporate or government bonds. What is more, however, the less affluent households or businesses or governments have either no access to loans or face higher costs of borrowing given higher interest payments in addition to coming up for the generally rolled over interest in the economy compared with their more creditworthy counterparts who receive better interest rates and also get to borrow a lot more in volume respectively, therefore widening or at least solidifying the perceived wealth gap even further (Piketty, 2014).

Sociological perspective

Sociological accounts of inflation in general share some of their analytical assumptions with scholars from political economy traditions (see above), most prominently the critique of (orthodox) economic conceptualisations (e.g., the 'economism' of the neoclassical school as Bourdieu (1990) had put it) as well as an emphasis on the political and social, thus inherently conflictual, embeddedness of economic phenomena (see for instance Ingham 2004, pp. 80-81). Goldthorpe (1978) provides a good starting point in exemplifying how a sociological perspective on inflation may integrate both of the research objectives mentioned. He applies a sort of immanent critique to economic explanations of inflation by identifying so-called 'residual categories', i.e. causal factors within a theory which are advanced in order to explain certain empirical outcomes, but whose formation/emergence is itself dependent on aspects exogenous to the original analysis, before he proceeds to propose a productive alternative.
For instance, monetarists tend to explain inflation via an increase in the money supply (see above) whose determination is, in turn, a public prerogative. Why, however, politicians or central bankers pursue monetary expansion to begin with, cannot be answered in an endogenous manner; according to Goldthorpe (1978, pp. 187-89), this issue is either solved by recurring to normative arguments (e.g. governments acting 'irrationally' or applying 'bad economics') or through an extension of the economic analysis to subjects traditionally outside its own theoretical purview: "the problem of governmental policy in regard to inflation is defined in 'market' terms - i.e. in terms of the 'political market' - and a solution is sought in the analysis of political-market forces" (Goldthorpe 1978, p. 188).

A similar problem arises with a second inflation theory based on 'cost-push' considerations. Here, not public authorities but trade unions and their "recurrent and 'leapfrogging' demands for higher pay" (Goldthorpe 1978, p. 189) are the central agents who account for increases in the price level. The origin of such excessive wage demands is, again, to be found in non-rational behavior which standard economic theory is, in fact, poorly - or not at all - equipped to explain: contemporary scholars optionally advance notions of "inter-union rivalry", "jealousy" or "ideology" (Goldthorpe 1978, pp. 191-2) that incite union leaders to ignore the inevitable consequences (= an ever higher price level) of their engagement.

Goldthorpe proposes instead to approach inflation through a sociological lens, that is a) to connect the former to "on-going changes in social structures and processes" (Goldthorpe 1978, p. 195) rather than focusing exclusively on interactions within the economic sphere, and b) to operate with analytical categories that allow to apprehend the putative irrational agency of unions and the like as (socially) intelligible. He emphasizes three interrelated causal factors that historically contributed to "a heightening of social conflict" (Goldthorpe 1978, p. 196) in capitalist societies: First, the weakened role of social status as a moral legitimation for class inequalities, in the sense that cultural privileges (for instance aristocratic lines of descent) no longer justify diverging socio-economic realities. As a result, social conflict becomes more likely "[f]or once the normative ordering of status is removed, there is no obvious reason why the pay claims of different groups of workers should not expand and lead to the pursuit of relativities that are highly intransitive" (Goldthorpe 1978, p. 200). Second, the comprehensive introduction of citizenship (Marshall) as "the principled equality of rights" (Goldthorpe 1978, p. 202) among members of the same national community tends to accentuate inequalities generated by market processes and government policies allowing for (increased) unemployment - thereby potentially evoking a "forceful reaction" (Goldthorpe 1978, p. 204) by workers and trade unions. Third, the emergence of what Goldthorpe phrases a socio-politically 'mature' working class for whom "trade unionism [...] is the normal mode of action by which conditions of work and standards of living are to be defended as much as possible improved." (Goldthorpe 1978, p. 207)

Having advanced these rather general explanations for the behavior of economic and social agents orthodox economic theories fail to conceptualise, this interpretation surely neglects the role of varying institutional setups (e.g. wage-bargaining systems) in contemporary capitalist societies. What is more, Goldthorpe wrote at a time marked by the 'stagflation' experience following the historic oil crises - whether, or to what extent, implications can be derived for empirical cases that are for instance defined by persisting deflation (e.g. Japan's 'Lost Decade') or more general trends such as the continuing decline of union density in industrialized economies remains questionable at least.

More recently, what can be read as attempts to address some of these shortcomings came from institutionalist-inspired scholars such as Hall and Franzese Jr. (1998). Applying a CPE (Comparative Political Economy) perspective, the authors analyze interactions between central banks and domestic wage bargaining systems - conceptualizing the latter as "the degree to which trade unions and employer organizations actively coordinate the determination of wage settlements across the economy" (Hall and Franzese Jr. 1998, p. 509) - and their respective macroeconomic effects. Their quantitative, cross-national (OECD-centered) research challenges the contemporary, neoclassical-monetarist case for independent central banks by emphasizing signaling mechanisms between the former on the one hand and bargaining agents on the other which empirically are most effective in coordinated wage bargaining systems (Hall and Franzese Jr. 1998, p. 524). Since newly found wage settlements between unions and employer organisations in that setup tend to influence the domestic economy's situation more directly than in decentralised, uncoordinated cases, "the central bank is likely to respond directly to it" (Hall and Franzese Jr. 1998, p. 511). This, in turn, additionally alerts organisations for signals regarding the central banks' (future) policy stance which thereby "may be able to influence the level of settlements and reduce inflation [...]" (Hall and Franzese Jr. 1998, p. 511). Hence, lower inflation does not exclusively hinge on central bank independence but "on the character of a variety of societal organizations [...] that have emerged out of a long historical process and may not be highly amenable to political engineering" (Hall and Franzese Jr. 1998, p. 525) - a conclusion consistent with the propositions made by Goldthorpe above.

On a more systemic, historically-oriented level, Streeck (2011, 2014) repeatedly emphasised the role of inflation as a (political) means "to defuse potentially destabilizing social conflicts" (Streeck 2014, p. xiv) during the first critical juncture Western post-war capitalism faced in the first half of the 1970s. In a situation that already was strained due to large workers' strikes (1968 and following), governments "faced the question of how to make trade unions moderate their members' wage demands without having to rescind the Keynesian promise of full employment" (Streeck 2011, p. 11). Whereas corporatist countries could - to some extent - rely on tri-partite 'social dialogue' to assure wage restraint, economies without a restrictive institutional setup had recourse to expansive monetary policy as "a convenient ersatz method for avoiding zero-sum social conflict" (Streeck 2011, p. 12, original emphasis) between labor and capital. Thereby, at least temporarily, policymakers willingly accepted higher inflation rates "while allowing free collective bargaining and full employment to continue to coexist" (Streeck 2011, p. 11). Once this rise of inflation accelerated, however, the material, distributional impact on different social groups became more and more visible (see Krippner 2011, pp. 17-8 for the US case) and politicians had to rethink their strategy - a volte-face that culminated in the Volcker shock of 1979.

What such sociologically inspired perspectives thus demonstrate is that inflation constitutes by no means a technical and neutral variable which is the unilateral result of steering the money supply in an economy; rather, there exist multiple, conflicting interests of distinct agents underlying these developments and adding layers of complexity which may be difficult to be fully apprehended with standard economic methodologies only.

Many thanks for the comments and review by the Exploring Economics Macro-finance working group. If you'd like to add a segment on Inflation in another economic theory or school of thought we very much welcome addition. Just contact us here.


Anderegg, R. (2007): Grundzüge der Geldtheorie und Geldpolitik. München: Oldenbourg Verlag.

Arestis, P. (1996), ‘Post-Keynesian economics: towards coherence’, in: Cambridge Journal of Economics, Vol. 20(1), pp. 111-135.

Atesoglu, H. S. (1999) 'Inflation: conflicted claims approach' in O'Hara, P. A. Encyclopedia of Political Economy: A-K, pp. 510-512.

Blanchard, O. (1991) ‘Neoclassical Synthesis’. In: Eatwell J., Milgate M., Newman P. (eds) The World of Economics. The New Palgrave. Palgrave Macmillan, London. [online available at:]

Bourdieu, P. (1990) The Logic of Practice. Stanford, California: Stanford University Press.

Di Muzio, T. and Noble, L. (2017) 'The Coming Revolution in Political Economy: Money, Mankiw and Misguided Macroeconomics', in Real-World Economics Review, Vol. 80, pp. 85-108.

Douglas, C. H. (1931) The Monopoly of Credit. London: Chapman and Hall.

Ehnts, D. (2014) Geld und Kredit: eine €-päische Perspektive. Marburg: Metropolis Verlag.

Friedman, M. (1970) Counter-Revolution in Monetary Theory. Wincott Memorial Lecture, Institute of Economic Affairs, Occasional paper 33.

Galbraith, J. (1997) ‘Time to Ditch the NAIRU’, in Journal of Economic Perspectives, Vol. 11(1), pp. 93-108.

Goldthorpe, J. (1978) 'The Current Inflation: Towards a Sociological Account' in Hirsch, F. and Goldthorpe, J., The Political Economy of Inflation, Harvard University Press, pp. 186–216.

Hall, P. & Franzese, Jr., R. (1998) 'Mixed Signals: Central Bank Independence, Coordinated Wage Bargaining, and European Monetary Union' in International Organization 52, 3, pp. 505-535.

Hardcastle, E. (1974) 'Inflation: the theories and the facts', [online available at: <>, last accessed 06/04/2021].

Hoefgen, M. (2020) 'Die Rolle der Inflation in der Modern Monetary Theory' [online available at: <>, last accessed 11/10/2022]

Hung, H. and Thompson, D. (2016) 'Money Supply, Class Power, and Inflation: Monetarism Reassessed', in American Sociological Review, Vol. 81(3), pp. 447-466.

Ingham, G. (2004) The Nature of Money. Cambridge/Malden, MA: Polity Press.

Isaac, A.G. (1999) 'Inflation: conflicted claims approach' in O'Hara, P. A. Encyclopedia of Political Economy: A-K, pp. 508-510.

Kelton, S. (2022) 'Stephanie Kelton on MMT and the Inflation We're Seeing Today' [online available at: <>, last accessed 11/10/2022], part of the podcast series 'Odd Lots', Bloomberg, 2015-, <>

Keynes, J. M. (1936) The General Theory of Employment, Interest, and Money, Palgrave Macmillan.
Kirshner, J. (2001) 'The Political Economy of Low Inflation', in Journal of Economic Surveys, Vol. 15(1), pp. 41-70.

Krippner, G. (2011) Capitalizing on Crisis. The Political Origins of the Rise of Finance. Cambridge, MA/London: Harvard University Press.

Lipietz, A. (1982) 'Credit Money: A Condition Permitting Inflationary Crisis', in Review of Radical Political Economics, Vol. 14(2), pp. 49–57.

Mankiw, N.G. (2019): Macroeconomics. 10th ed., New York City: Worth publishers.

Marx, K. (1887) ‘Capital - A Critical Analysis of Capitalist Production’, in Marx/Engels Gesamtausgabe (MEGA) Abt. 2, Bd. 9, Berlin: Dietz Verlag.

Mitchell, B. (2021): Modern Monetary Theory,
[online available at: <>, last accessed 09/24/2021]

Piketty, T. (2014) Capital in the Twenty-First Century. London: Belknap Press.

Sawaya, R. R. (2013) Value, price, inflation and the Power of Capital: a Marxist Vision, [online available at: <>, last accessed 06/04/2021].

Stiglitz, J. (1974) ‘Alternative Theories of Wage Determination and Unemployment in LDC's: The Labor Turnover Model’, in Quarterly Journal of Economics, Vol. 88(2), pp. 194-227.

Streeck, W. (2011) 'The Crises of Democratic Capitalism' in New Left Review 71, pp. 5-29.

Streeck, W. (2014) Buying Time. The Delayed Crisis of Democratic Capitalism. London/New York: Verso.

Tooze, A. (2021) Chartbook Newsletter #22: How do you count inflation? Tracking Weimar's hyperinflation., [online available at: <>, last accessed 07/12/2021].

Veblen, T. (1923) Absentee Ownership: Business Enterprise in Recent Times. New Brunswick: Transaction.

Weintraub, S. (1978) Capitalism's Inflation and Unemployment Crisis: beyond Monetarism and Keynesianism, Addison-Wesley.

Wray, L.R. (2015) Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems, London: Palgrave Macmillan

Wullweber, J. (2021) Zentralbankkapitalismus, Berlin: Suhrkamp.

This material has been suggested and edited by:


Ten projekt został stworzony przez Sieć na rzecz Pluralistycznej Ekonomii (Netzwerk Plurale Ökonomik e.V.).  Jest on zaangażowany w różnorodność i niezależność i jest zależny od darowizn od ludzi takich jak Ty. Regularne lub jednorazowe datki będą bardzo mile widziane.