If the supply of money is fixed, and the cost of some things

Posted on: June 19, 2025 at 22:22:42 CT

goes up, that shouldn't make the cost of everything on average go up, right?

If the cost of groceries goes up, for instance, peope will try and economize and shift to less expensive alternatives on groceries. But to the extent that they can't, they have less money in their budget/wallet/bank and will have to cut back elsewhere sooner or later.

Maybe they won't go out to eat as much, or will not go to the movies or bars or sporting events or whatever. Some may put off the purchase of a new(er?) vehicle or will opt for less expensive forms of transportation... a cheaper vehicle, or a bike, or a bus, or maybe walking more or uber or some combination of things.

The bottom line is that an increase of the cost of some things will necessitate a reduction in spending in some things or in savings/investment.

Less savings/investment will tend to increase interest rates, all other things being equal.

Decreases in spending elsewhere and higher interest rates will tend to slow an economy down and be a counterbalance to inflationary pressures.

It is generally self-regulating to an extent with respect to inflation. There may be a reduction in standard of living if there is a reduction in supplies of cheaper goods from other countries, but it shouldn't result in higher inflation all other things being equal.

Of course all bets are off when the Fed intervenes and starts "printing money" or sucking money out of the money supply in their efforts to goose the economy or slow it down.