Writing economics books on contemporaneous policy issues is a tough game. You are torn between three types of discussion: using history to illuminate the present, writing educationally to inform the broader public, and trying to use the platform to critique policymakers’ thinking and improve outcomes. Few authors can hit all three in one text, particularly on something as contentious as macroeconomic policy. But that’s the ambition of We Need To Talk About Inflation by Stephen D. King, a British economist who until 2015 was the chief economist at the multinational bank and financial services firm HSBC. The result of his effort is a triumph.

At 183 pages excluding notes, the book is brisk but wide-ranging, superbly written, and full of insight. It somehow manages to cover the theories of inflation, the role of governments in causing inflation, the economic history of inflation, the damage of inflation, the failures of price controls, debates on how to curb inflation, and the pros and cons of inflation-targeting regimes. He does all this without resorting to dry academic analysis or a priori reasoning. Instead, the ideas are largely illuminated through stories and examples, drawing on events as varied as the Roman price controls of 301 A.D. and today’s debates about the causes of the 2021–2022 inflation spike.

King is not a strict adherent to any macroeconomic school of thought. For a general reader, the book is better for avoiding such dogmatism. That said, it is clear where his sympathies lie. Milton Friedman and Anna Schwartz were largely correct that inflation is a monetary phenomenon, he says. Yes, supply shocks can lead to jumps in the price level, but inflation’s persistence ultimately depends on accommodating those shocks through looser monetary policy. But this belief that “money matters” must be buttressed by a recognition that shifting public trust in money can lead to wild swings in its volatility. As inflation really takes off, people want to reduce their real money balances and buy up other commodities, causing price inflation to soar further. This increase in velocity contributes to inflation even when the money supply is growing relatively slowly. That is a key part of the stories of hyperinflationary collapses—edge cases that help us illuminate the harm inflation causes.

The book is genuinely interesting throughout, yet also wide-ranging, so choosing sections to review is difficult. But three areas where King has a lot of particularly interesting things to say are on how policymakers might think about inflation’s persistence, why inflation matters, and the difficulties of alleviating modest inflation.

New tests / King began to warn of inflation’s return in early 2021. Having subscribed to the mainstream view that inflation had largely been conquered by independent central banks through the 2010s, his thinking coalesced around four fears.

First, he wondered whether the price-depressing effects of globalization in the past had flattered central banks’ actual inflation-fighting record and foresaw that some of those benefits of globalization were about to unwind, putting upward pressure on prices. Next, he took seriously what he was hearing about how the pandemic could scar economies’ potential to produce goods and services, reducing our economic capacity. Third, he saw that the combination of fiscal and monetary stimulus in response to the pandemic had been huge—meaning that there were very few bank failures and bankruptcies—while unemployment had quickly returned to low levels. And, finally, he began to think that central bankers were guilty of hubris, believing that they’d obviously keep inflation in check because the public would believe they’d keep inflation in check owing to the banks’ 2010s record.

We all know what happened next. Central bankers were wedded to a world that no longer existed. They thought the 2021 inflationary pressure was “transitory” and would soon peter out. It did not and, in fact, still looks stubborn across many countries in early 2023, despite the monetary tightening that has occurred so far.

How might monetary policymakers better assess whether inflationary pressures are likely to be more persistent in the future? King posits four “tests” that they should consider. If the answers to the questions are “yes,” then our monetary overlords should be alive to the threat of ongoing elevated inflation. The implicit critique is that, by failing to consider these questions this time, central bankers were asleep at the wheel, allowing aggregate demand to outstrip supply.

  • Test 1: Have there been institutional changes that would suggest an increased bias in favor of inflation? Unfortunately, by 2021, the answer was yes. The Fed’s move in 2020 to an average inflation targeting regime is one example. It created a dynamic in favor of above-target inflation, King argues, because the public knew that central bankers would be less likely to react to big overshoots in inflation with big undershoots that risked a bout of much-feared deflation. The use of quantitative easing (QE) for over a decade, too, put downward pressure on bond yields, eroding the value of freely moving bond prices as an indicator of inflationary pressures. And central bank independence paradoxically made the monetary authorities less willing to spell out the inflationary consequences of large amounts of government borrowing when inflation started rising significantly; musing on this would be seen as too political.
  • Test 2: Were there signs of monetary excess? Again, this time, yes. The money supply measure M2 (cash, checking deposits, and easily convertible assets) had risen dramatically during lockdowns, increasing 19 percent in 2020 and then 16 percent in 2021, compared with just 5 percent in 2019. Banks survived, equity markets soared, and then, as the pandemic waned, the velocity of money picked up, putting previously idle money to use. Monetary aggregates might be a bad guide for micromanaging inflation year-to-year, but as a flashing indicator this was incredibly important to be aware of for the big picture. Central banks took their eye off the ball.
  • Test 3: Were people trivializing or excusing inflation? Yes. Just as in the 1970s, policymakers reached for their time machines and said inflation would soon fall. Soaring energy prices were dismissed as one-off effects and supply chain problems would inevitably unsnarl. Unions were less powerful than in the 1970s, policymakers said, meaning price pressures wouldn’t then become wage pressures. What good would it do for central bankers to meet these various supply shocks by also squeezing demand? Whenever we hear such overconfidence about inflation being under control, we should be fearful.
  • Test 4: Were supply conditions in the economy worsening? It’s difficult to assess an economy’s supply potential at any given time. But the aftermath of the pandemic was creating worker shortages, lockdowns had led to a lot of fractures in supply chain relationships and uncertainties about consumer demand patterns, China and the United States were in a period of policy decoupling on trade, and then, of course, we saw Putin’s invasion of Ukraine. Occam’s Razor: the ability for the economy to produce goods and services was impaired. That makes the high level of stimulus we saw even more questionable.

King’s four tests incorporate various macroeconomic schools’ warning systems for inflation. And even though they were drawn up retrospectively to reflect the experience of the past two years, central bankers should employ them as a useful mental exercise when future shocks hit. Indeed, King would clearly like central bankers to focus more on price stability again. The broadening of their remits to include financial stability and the greening of the economy clearly irks him for diluting policymakers’ focus.

Distributional costs of inflation / Why is inflation such a bad thing? Many people conflate inflation with the cost of living and are hostile to it because of the effect a rising price level has on the real value of some fixed forms of income and wealth. But King uses a remarkable statistic to show that this shouldn’t be our main inflationary fear.

Germany famously suffered a terrible hyperinflation in 1922–1923, with a monthly inflation rate of 322 percent. Yet, remarkably, German real incomes per capita fell only 7.8 percent between 1918 and 1923, considerably less of a decline than seen in the United Kingdom over the same period. In other words, even though prices were shooting up, so were nominal incomes—at least across the economy in aggregate.

The major costs of large bouts of inflation are not that they make us worse off, though for many people they undoubtedly do. No, the three biggest costs of high inflation are:

  • it makes economic planning incredibly difficult, causing people to invest time in thinking about inflation to the detriment of more productive activities,
  • it leads to extreme redistributions of wealth that are rightly perceived as arbitrary and unfair, and
  • it leads to bad policy responses that can make the economy less efficient still.

King’s examples of how high inflation affected decision-making in Weimar Germany are striking. One man bought two bottles of beer at the same time, fearing that the price of the second would have risen significantly by the time he’d finish the first. Academics sold their entire libraries of books to purchase a loaf of bread. Every day in an extreme inflation world, people must think more deeply about the effects of their decisions, trying to second-guess what the consequences of inflation are going to be and leading them to make choices they’d rather spurn. Inflation both creates futile work (such as regularly changing menu prices), as well as perverse incentives (King explains how Turkish wholesalers tried to protect themselves against inflation in the 1990s by hoarding washing machines). A lot of businesses don’t know if the higher costs they are facing are industry-specific or economy-wide, leading to a misallocation of resources.

And this is what the real income per capita numbers hide: large bouts of inflation create extreme winners and losers in quite undemocratic ways. A sudden bout of inflation obviously makes those on fixed incomes or stable government benefits a lot worse off, while those for whom wage increases occur only infrequently see their purchasing power collapse. On the other hand, those who can borrow heavily and invest the funds in physical assets and real estate, or who have a lot of pricing power over their labor, can often come out of inflationary periods sitting (relatively) pretty. These effects are often arbitrary and politically explosive.

Impulse for bad policies / People will not put up with these disruptions for long before they demand that politicians act. Unfortunately, that can lead to bad policies, such as bailing out some people (a palliative that doesn’t solve the underlying inflation problem) or price controls (which create shortages and all sorts of other inefficiencies). King exhaustively and patiently takes on the case for price and wage controls, expertly using the historical evidence to rubbish their prospect of solving inflation.

Deep down, most economists know (or think they know) what is needed to cure inflation: an independent central bank, tightened monetary policy, and fiscal prudence to mitigate the incentive for inflation becoming too high. Yet today we can see that ridding the economy of elevated inflation is easier said than done.

Counterintuitively, King argues that defeating hyperinflations may be easier than the more modest inflation that we see today. The damage of extreme hyperinflations is so obvious and typically is the result of a complete breakdown in monetary discipline. As a result, policymakers and the public are eventually more accepting of the strong medicine needed to bring hyperinflation to an end. A credible push to implement the structural changes needed to eradicate it are unlikely to run up against many hyperinflation “enthusiasts.”

In countries such as the United States and UK, with their elevated but more modest inflation rates, the situation is far messier. The current inflation doesn’t make economic life impossible. Meanwhile, too many people benefit or at least are not overly harmed by its presence, with a much larger proportion of the population fearing they might lose out from a macroeconomic tightening and the subsequent “disinflation” that squeezing demand causes. So once this sort of modestly high inflation starts, it takes a lot longer to bring it back down sustainably.

Navigating the moment / This well-argued book could not be better timed. For those worried about recent events, how we got here, and what history shows about the difficulty of getting back on track to price stability, King’s breadth of research and turn of phrase are invaluable in navigating the moment. It is a near-perfect read for those who closely follow current affairs and have somewhat of a grounding in economics.

If I were to nitpick, I’d suggest the book could have been more accessible to a yet wider audience if, early on, it had clearly defined inflation (as opposed to relative price changes or even changes in the price level) and explained at a high level how it is measured through consumer price indices. This may have helped dispel the tendency among the public to conflate inflation with some individual price increases, a confusion that leads many ordinary people to not really grasp what inflation is about and to blame businesses and unions for central bank errors.

King also is clearly correct that both supply-side and demand-side factors have driven the surge in the price level since 2021. Yet, one downside of his not outlining his own “model” of the economy is the failure to define his own preferred monetary rule and so make a judgment on what actions central banks should have taken and when. He admits that in periods like what we’ve lived through, “policymakers are not easily able to distinguish inflationary squalls from periods of inflationary persistence.” That is true, but it is difficult to square with his justified criticism of the complacency of the economic establishment in letting the inflation genie out of the bottle of late.

A book cannot do everything, though, and this one was written as the inflationary picture was continually evolving. Overall, it is the best book on the market for using this moment to deliver lessons in history and advice to policymakers. It somehow remains both broad and deep, explaining the perils of ever thinking that inflation is whipped right through to analyzing what went wrong with former UK prime minister Liz Truss’s infamous mini-budget.

Former U.S. treasury secretary Larry Summers, who also warned about the risk of inflation in early 2021, declares on the back cover, “King’s lessons command our attention.” If you want to understand inflation better or put today’s experience into its proper historical context, you should read this book.