The government and central bank have created enormous amounts of new money and credit, and measured inflation still reads 2 or 3%. That small number is a net. Underneath it, two huge forces are pushing against each other. Technology pushes prices down, year after year. The government and central bank push them back up by creating new money and credit. The published figure is the little bit left over after those two forces mostly cancel. Reading it as “not much is happening” is the mistake. The calm of the number is bought by the violence of the cancellation.
If you take the 2% at face value, you draw two false conclusions at once. You conclude the money system is roughly stable, and you conclude technology doesn’t really lower the cost of living. The natural state of a free market is falling prices, but you can never observe that state directly across the whole economy, because policy overwrites it before it reaches the till. You have to reason your way to the prices that should have existed. That’s what we’re doing here.
The two forces
The downward force is technology. When a firm gets better tools, the same goods take fewer hours and fewer inputs to make. Competition then forces the saving into the price, because a rival with the same tools will undercut anyone who tries to keep the difference. So in an honest system prices drift down toward the cost of making one more unit. Nobody can measure the natural rate exactly, for a reason I’ll get to, but the range is something like 1% to 5% a year. The rate keeps rising as software and now AI spread into more of the economy.
The upward force is money and credit creation. Our money is loaned into existence [most new pounds are created when banks make loans], and the debts are nominal [the pound amount you owe stays fixed whether prices rise or fall]. If prices broadly fall, wages and revenues follow them down, but the repayments don’t shrink. The debt takes a bigger bite of everyone’s income each year until people and firms default, and the defaults spread through the banks to everyone else. That’s why the system can’t tolerate falling prices. The central bank targets 2% inflation and does whatever it takes with rates and asset purchases [buying bonds and other assets with newly created money] to get there.
So put the two together. Say technology would have moved prices to minus 3% this year, and the shops show plus two. To get from minus three to plus two, policy had to move prices by roughly five points, against the current. The picture I use is a moving walkway. It runs backwards at three steps a minute, which is technology pulling prices down. Walk forward at three and you stay exactly where you are. To end up two steps ahead, which is what the shops show, you have to walk at five. Someone watching your position sees a figure barely moving and concludes there’s no effort anywhere in the scene. The walking is the money creation. The barely-moving position is your 2%.
How each hides the other
The money creation hides the deflation because the prices you should have had never appear on any receipt. You can’t see the £45 weekly shop that would have existed after a decade of those gains reaching you. The one you can see costs £80. So the fall in the real cost of making things is invisible everywhere except the few categories falling so fast the average can’t hide them, like electronics and software. People then conclude that rising prices are a law of nature, and economists teach that a little inflation is necessary, when what’s actually necessary is the survival of the debt structure.
The deflation hides the money creation because collapsing production costs absorb the new money that lands in the shops. The trillions created since 2008, and for decades before, would have produced obvious and politically fatal inflation in a world where costs stood still. Costs didn’t stand still. They fell hard, and the fall soaked up what landed, so the average price level stayed tame and the money creation looked free. The technology dividend quietly paid the bill for the policy.
Each force conceals the other, which is why the public debate about “inflation versus deflation coming” is a red herring. Both are happening at once, in different layers, and arguing about the net keeps everyone from seeing either gross force [the full size of each one before they cancel].
And when the upward force briefly outran the offset, the mask slipped exactly as you’d predict. In 2020 the United States was creating money on the order of 5 trillion dollars a year, in a country where all corporate profits in 2019 were about 2.25 trillion. Even if the taxman had taken every dollar of those profits, it wouldn’t have matched the new money. Consumer inflation duly arrived, peaking near 9% in the United States and above 11% in Britain, and then fell back fast once the emergency creation stopped, partly through base effects [this year’s change is measured against last year’s unusually high level]. The spike confirms the mechanism. Push one side hard enough and the net turns visibly positive. Then the underlying downward pull reasserts itself.
What the small net number hides
1.An annual transfer measured from the wrong baseline
From zero, 2% looks like a rounding error. From the minus three of our example, or the minus five at the top of the range, the gap is five to seven points of purchasing power [what your money can actually buy] a year. That gap is the productivity gain that workers and machines really did produce, and it went to whoever the new money reached first instead of reaching you as lower prices. It compounds, year after year. No official statistic can ever show it, because statistics measure what happened, and this is the distance between what happened and what should have happened.
2.Where the new money went
New money spreads unevenly. It enters at specific doors [the Cantillon effect, the people closest to where new money enters benefit first, before prices adjust]. And it chased assets first. Houses aren’t in the CPI basket [the consumer price index, the official list of everyday prices used to measure inflation], or barely so, and shares aren’t in it at all. A doubling house price gets recorded as wealth, not as inflation. Inside the basket the average hides a violent split too. The electronics column falls fast while the rent, healthcare, tuition, and insurance column rises fast. Both stories are true at once, which is why the index can read 2% while the essentials you can’t skip feel far worse. Add shrinkflation [same sticker price, smaller portion or worse service], a price rise that indexes struggle to catch.
3.Whose life the number prices
Inflation and wage deflation are the same event from two sides. If prices rise faster than your pay, your pay fell in real terms, full stop. A 3% raise feels good until rent and food jump 8%. One side of the ledger rises and the other falls, so the 2% world runs an annual transfer from wage earners and savers to asset owners. Then we spend our politics arguing about the symptoms.
4.The growing dose behind the flat number
Technology’s downward force compounds, so the offsetting creation has to compound with it. The world added roughly 185 trillion dollars of debt in the two decades to 2020 to buy about 46 trillion of growth, and each crisis has needed a bigger rescue than the last. A stable-looking 2% means a system running harder each cycle to hold the same two steps of lead on that walkway. That flat number is what fragility looks like from outside.
5.The corruption of the price signal
Prices are information. When every price is part production cost and part policy, nobody can tell what anything is worth, what’s scarce, or which projects pay. Money flows into ventures that only make sense because more money is coming. The 2% hides that the economy’s measuring instrument no longer measures.
Taking the number at face value
“The statisticians aren’t lying.”
Mostly agreed, and it doesn’t matter. An honest CPI answers the wrong question. It measures movement from zero, and the transfer is the gap against the prices that should have existed, which no basket is built to capture. Method choices like hedonic adjustment [marking a price down in the index because the product got better] do flatter the number at the margins. Deeper down, 2% is defined as success, so the measure becomes the goal. But the baseline error is the main event.
“If printing were that big, we’d see hyperinflation.”
You see the inflation in whatever the new money chases. It chased assets, which the index doesn’t price, or barely so, and in the shops it was offset by collapsing costs. When creation went extreme in 2020, consumer inflation arrived on schedule, twelve to eighteen months later.
“We need 2% or people stop spending.”
People still buy phones, laptops, and TVs even when they expect next year’s model to be better or cheaper. Falling prices trim wasteful purchases and leave the useful ones alone. Two percent is what the debt structure needs to survive. The structure’s need got rebranded as the economy’s need, and then as yours.
Priced in a money nobody can print
Change the ruler. Price the same goods in a money nobody can create more of, and the hidden half of the picture becomes visible. Measured in bitcoin across multi-year stretches, houses and much else have been getting cheaper even as their pound prices were rising. Same houses, same world, different unit. That’s the whole point. When the unit holds still, movement shows up as movement. When the unit is moving too, the reading carries both movements and separates neither. The real cost of making things falls, the pound loses value faster, and what you read on the price tag is the small difference between them.
Measured inflation is a net, and the net is what two enormous gross forces leave behind when they cancel each other. Everything the number hides is inside that cancellation.