Inflation is a general rise in the price level, which is the same fact seen in a mirror, your
money buying less of the same basket than it did. What causes it in a given year is a separate
question, and the answer is not always the same one.
The one thing to remember: a central bank does not set prices, wages or
mortgage rates. It sets the price of very short-term money and manages expectations, and
everything else follows indirectly, with long and variable lags.
What is being measured
Inflation is measured by pricing a fixed basket of goods and services repeatedly and watching
what the total does. In the United States two indexes matter. The Consumer Price Index is
produced monthly by the Bureau of Labor Statistics and is what most people mean by "inflation";
it is also the index that adjusts Social Security and many contracts. The Personal Consumption
Expenditures price index is produced by the Bureau of Economic Analysis, updates its basket
weights more often, and is the index the Federal Reserve's 2 percent goal is actually defined
on. The two normally differ by a few tenths of a percentage point, which is enough to matter in
a policy argument and not enough to matter in your budget.
Both are averages, and no household buys the average. If your spending is weighted toward rent,
childcare and medical care, your personal inflation rate can run well above the headline for
years. That is not a flaw in the statistic; it is a limit on what a single number can tell you.
What a central bank is, and what it does
The Federal Reserve was created by an Act signed on 23 December 1913, after the Panic of 1907
made plain that the country had no lender of last resort. Its structure is deliberately odd:
twelve regional Reserve Banks, a Board of Governors in Washington, and a Federal Open Market
Committee that sets policy. Congress gave it its objectives in statute in 1977: maximum
employment, stable prices, and moderate long-term interest rates. In practice this is called the
dual mandate, and the two halves regularly pull against each other.
"Stable prices" was not defined numerically until January 2012, when the FOMC published a
longer-run goal of 2 percent inflation. That statement has been revised since, substantially in
August 2020, and again following a framework review completed in 2025. Because it changes,
read the current text at the link below rather than any summary, including this one.
The tools, and how far each one actually reaches.
Tool
How it works
What it reaches
The policy rate
Setting the interest paid on banks’ reserve balances and the rate on overnight reverse repos, which brackets the rate banks lend to each other at.
Everything priced off short rates: card rates, business credit lines, savings accounts, and, with a lag and a lot of noise, mortgages.
The balance sheet
Buying or letting mature large quantities of government and mortgage bonds.
Longer-term interest rates and the quantity of reserves in the banking system.
Forward guidance
Saying what it expects to do, so markets price it in now.
Expectations, which are half the battle in inflation.
The discount window and emergency facilities
Lending to solvent banks against collateral when funding markets seize.
Financial stability, not the price level.
Bank supervision and regulation
Capital, liquidity and stress-testing rules.
How much risk the banking system carries into the next shock.
The record, with dates
A century of American monetary policy in seven entries, earliest first.
When
What happened
Detail
1913
Federal Reserve Act signed, 23 December
Created after the Panic of 1907: twelve regional Reserve Banks under a Washington board.
1965-1982
The Great Inflation
US consumer price inflation peaked at 14.8 percent year over year in March 1980.
1977
The mandate written down
Congress directed the Fed to pursue maximum employment, stable prices and moderate long-term interest rates.
1979-1987
The Volcker disinflation
Paul Volcker became chairman in August 1979; policy rates were pushed into the high teens and inflation broke, at the cost of a severe recession in 1981 and 1982.
2008-2014, 2020-2022
Quantitative easing
With policy rates near zero, central banks bought long-dated assets to push down longer-term rates.
2012
An explicit 2 percent target
The FOMC first published a numerical longer-run inflation goal in January 2012, defined on the PCE price index.
2021-2023
The post-pandemic inflation
US CPI reached 9.1 percent year over year in June 2022, the highest reading since 1981; the Fed raised its target range from near zero to 5.25 to 5.50 percent by July 2023.
When it goes badly wrong
Hyperinflation is a different animal from high inflation: it is the currency being abandoned in
real time. The best-known modern cases are Germany in 1922 to 1923, Hungary immediately after the
Second World War, Zimbabwe in 2007 to 2008 and Venezuela in the late 2010s. Scholars' compilations of
hyperinflations rank Hungary in 1946 as the most extreme episode ever recorded, with prices
roughly doubling on a timescale of hours rather than months. The mechanism is always the same:
a government that cannot raise enough in taxes or borrow enough at any price finances itself by
creating money, and the public works out what is happening faster than the government expected.
Deflation (a sustained fall in the price level) is rarer and, for a borrower, worse. Debts are
fixed in money terms, so if money gains value every year, every debt silently grows. Japan spent
much of the 1990s and 2000s in this territory. A 2 percent target is partly a deliberate buffer
against ending up there.
What central banks cannot do
They cannot make a shortage of houses, chips, or diesel go away. Supply shocks show up as
inflation and there is no interest rate that manufactures more oil. They cannot set your
mortgage rate, which is priced off long-term bonds and lender competition. They cannot decide
who bears the cost of disinflation: raising rates to break inflation works partly by making
people unemployed, which is the plain and uncomfortable fact underneath every policy statement
written in careful language. And they cannot, over long periods, make a country richer: real
wealth comes from work, skill, capital and institutions, which is the subject of
what is wealth.
Scripture on a shrinking measure
The Bible has no word for monetary policy and a great deal to say about false measures. In an
economy where money was weighed metal and goods were sold by volume, cheating the ephah and the
shekel was inflation: the same silver buying less grain because someone shaved the
measure. Amos names it as one of the sins for which a nation is judged.
4Hear this, you who desire to swallow up the needy, and cause the poor of the land to fail, 5Saying, ‘When will the new moon be gone, that we may sell grain? And the Sabbath, that we may market wheat, making the ephah small, and the shekel large, and dealing falsely with balances of deceit; 6that we may buy the poor for silver, and the needy for a pair of shoes, and sell the sweepings with the wheat?’”
The complaint is not that prices are high. It is that the measure has been rigged and the poor pay for it. They are exactly who is hurt worst when a currency loses value, because they hold cash and have no assets that reprice.
Isaiah uses the same picture at the level of a whole society: silver become dross, wine mixed
with water (Isaiah 1:22). Debasement is an image of corruption, not a technical failure. Where
the analogy stops matters too: a modern central bank aiming at 2 percent is not a merchant with
two sets of weights, and treating monetary policy as automatic wickedness reads a metaphor as an
indictment. Keep the moral point: a measure that quietly shrinks transfers wealth from people
who cannot see it happening, and God notices who those people are.
Weighed by the Book
CommandedWhat Scripture commands
Use a just weight and a just measure (Leviticus 19:35-36; Deuteronomy 25:13-16; Proverbs 11:1).
Do not profit from the poor by rigging the terms of ordinary trade (Amos 8:4-6; Proverbs 22:22-23).
Pay what is owed to whom it is owed, including taxes (Romans 13:7).
WisdomWise application, not command
Plan in real terms. A savings target set in today’s money is smaller than it looks by the time you reach it.
Cash is safe in nominal terms and guaranteed to lose in real terms; an emergency fund accepts that trade on purpose, a retirement plan should not.
Fixed-rate debt behaves differently under inflation than variable-rate debt. Know which you hold.
FreedomWhere faithful people differ
Whether 2 percent is the right target, whether central banks should be independent, and whether a commodity standard would be better are prudential judgements. Scripture does not adjudicate them.
Christians differ on how much government should do in a downturn. Neither position is the biblical one.