“Inflation is always and everywhere a monetary phenomenon.”

Milton Friedman’s famous declaration sounds appropriately academic, but what does it actually mean for your grocery bill or your rent payment? And why should you care about monetary theory when you’re just trying to understand why everything seems to cost more than it did last year?

Let’s start with the basics. In economics, inflation is simply defined as an increase in prices. But when you hear it discussed on the evening news, what people are really talking about is price increases beyond the normal fluctuations caused by supply and demand.

You’re probably familiar with how supply and demand affect prices. Supply is how much of something is available for purchase, and demand is how much consumers want to buy. When there’s more supply than demand, prices generally drop to make products more attractive to buyers. When there’s more demand than supply, prices rise as a natural limiting mechanism.

Under normal circumstances, prices tend to be relatively stable, especially for physical goods, as markets find the balance between production and consumption. Food prices, for instance, don’t usually fluctuate dramatically (barring disasters like bird flu or massive crop failures) because suppliers have a pretty good idea of how much they need to produce to meet customer needs while maintaining profitability. We typically see this stability across a wide array of consumer goods and services.

So why do prices keep going up even when not much is changing in supply and demand?

The answer is that your money simply isn’t worth as much as it was the year before. But why isn’t today’s dollar as valuable as it used to be? That’s where Friedman’s “monetary phenomenon” comes in.

It turns out that currency is just as susceptible to the forces of supply and demand as anything else. And since the demand for money is—let’s face it—extremely stable by virtue of being essentially infinite, something must be happening on the supply side.

When demand for something hasn’t changed but supply increases, the price—in this case, the generally accepted value—goes down. The more dollars there are in circulation, the less each of those dollars is worth. It’s not that food or energy or housing is worth more; it’s that the dollars we use to pay for it all are worth less.

Only the U.S. Treasury Department is allowed to print U.S. currency, but the amount of currency printed is decided by the Federal Reserve, which takes delivery and distributes it. Some of this freshly printed money replaces worn-out bills that need to be removed from circulation. Some bolsters stability as wealth increases through economic growth and trade. But some of this total amount goes beyond the needs of general growth and simple bill replacement.

The detailed mechanics get complicated quickly, but the key point is that some of that “excess” goes to banks to cover loans (remember those low interest rates?), and some goes to the federal government to help pay for programs and expenses not covered by tax receipts.

All of that might sound relatively outcome-neutral, so what’s the big deal with inflation?

While it’s true that in the long run and across the entire economy, it mostly comes out in the wash (though there are broader implications from devaluing the dollar, which serves as the global reserve currency), that’s not universally true, and the short-term effects can be brutal.

If the injection of additional money into the economy is relatively small and done at a steady rate, the inflationary effects are small and fairly easily absorbed. Those on fixed incomes or living on their savings get the short end of the stick, but when price increases are small and predictable, they can at least be factored into future planning.

But recently, the U.S. has seen a surge in inflation, with price increases accelerating at rates not seen in decades. And those increases don’t need to reach the absurd hyperinflation levels of Zimbabwe, Venezuela, or the Weimar Republic to be devastating.

Here’s the kicker: currency injections into the economy don’t start out equally distributed across the entire population. Bankers and the individuals they lend to—people borrowing more than just a standard mortgage—are the first ones to benefit from an increased money supply. They’re the ones accessing the shiny new dollars first and are indeed the ones sending the signal that more dollars have entered the supply.

Eventually, through typical economic activity, those dollars will distribute relatively evenly throughout the entire economy, but that distribution isn’t immediate. It takes time. And while those dollars are still spreading out, prices have already gone up in response to the greater supply of money.

Basically, unless you’re one of the lucky few with first access, you’re paying more dollars without having more dollars. And those sharp price fluctuations have the most impact on people who tend to be the last ones to see increases in their own personal money supply—retirees and lower-income workers.

Economists call this the Cantillon Effect, named after the 18th-century economist Richard Cantillon, who first described how new money doesn’t affect everyone equally. This isn’t just an abstract economic concept. It’s a real mechanism that makes inflation particularly harmful to those who can least afford it.

And this is to say nothing of the knock-on effects beyond simple price changes, like job losses, economic stagnation, and social discord that often accompany significant inflationary periods.

So what does this have to do with capitalism? Everything and nothing. Inflation, as Friedman explained, is fundamentally about monetary policy—decisions made by central banks and governments about how much money to create and inject into the economy. These decisions happen outside the normal capitalist framework of voluntary exchange and market pricing.

In fact, inflation is a result of significant intervention in market processes. When governments create new money, they’re essentially redistributing wealth from savers to borrowers, from those with fixed incomes to those with variable incomes, and from those who receive new money last to those who receive it first. This isn’t the invisible hand of the market at work. It’s the very visible hand of monetary policy.

Understanding inflation as a monetary phenomenon helps clarify why it’s such a persistent problem in modern economies and why it disproportionately affects certain groups. It’s not a natural market outcome but rather the predictable result of specific policy choices about money creation.

The next time someone tells you that rising prices are just the result of “corporate greed” or “supply chain issues,” remember Friedman’s insight. While these factors can cause temporary price fluctuations in specific markets, sustained, economy-wide price increases have one primary cause: too much money chasing the same amount of goods and services.

Because when it comes to inflation, it really is always and everywhere a monetary phenomenon.

Learn more about capitalism here.