What Actually Causes Inflation | Steve Hanke

Oil spikes. Tankers stall. Fertilizer gets trapped in the Gulf. Food prices start climbing higher. The media screams inflation.

Steve Hanke, a Johns Hopkins professor of applied economics and former Reagan administration adviser, says that is surface-level thinking.

He is not saying war does not matter. It does. The Strait of Hormuz is one of the most important choke points on earth, and recent CSIS analysis notes the Gulf handles roughly 20 to 30 percent of global fertilizer exports. If that flow is disrupted, agriculture feels it and food prices can rise. That pain is real. But pain is not the same thing as inflation.

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Understanding Inflation

A rise in oil, fertilizer, wheat, or shipping is a relative price shock. Inflation, in the deeper and more dangerous sense, is a monetary event. It happens when the supply of money expands enough, and for long enough, that price pressure stops being isolated and starts spreading through the entire economy.

The European Central Bank has stated that one of the central predictions of monetary economics is a long-run one-to-one relationship between money growth and inflation. The Federal Reserve’s own history of the Great Inflation (1965-1982) says the same thing more bluntly: the roots of that era were policies that allowed excessive growth in the money supply.

That matters because the 1970s have been badly simplified in the public imagination.

Most people remember one story: oil shock equals inflation.

But the real story is different.

U.S. inflation was 3.3 percent in 1972, then jumped to 6.2 percent in 1973 and 11.0 percent in 1974. It surged again to 11.3 percent in 1979 and 13.5 percent in 1980. Yes, oil was a visible trigger. But the Fed’s own historical account argues the real failure was monetary. Policymakers let inflationary conditions build long before the oil shock.

That is Hanke’s point.

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Money Supply: The Proof

Oil gets the headlines because oil is easy to see. Money does the damage because money is harder to track.

Japan is the cleaner case study. Before the first oil shock, Japanese money growth was explosive and inflation later ripped higher. Before the second oil shock, policy had tightened materially. Oil still rose, but inflation behaved very differently. Same world. Same commodity stress. Different monetary backdrop. Different outcome.

In other words, the match matters. But the dry forest matters more.

This is why Hanke’s framework is so useful right now.

Investors are staring at crude, but the more important question is whether the monetary system is loosening again.

On that point, the latest U.S. data deserves attention. M2 money stock stood at $22.44 trillion in January 2026, up from $21.52 trillion in January 2025. That does not prove an inflation spiral is here. But it does show broad money supply has been re-accelerating. And once money growth turns, inflation risk stops being theoretical.

That is the story beneath the story.

Yes, a war can disrupt shipping. Yes, fertilizer shortages can lift food prices. Yes, tariffs can act like a tax on households. But those things become much more dangerous when they collide with loose money. That is when a shock stops being temporary. That is when it enters the bloodstream.

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Inflation Outlook in 2026

Hanke is forcing investors to separate two ideas that the modern financial press constantly blends together: higher prices and inflation.

They are not always the same.

Sometimes you are looking at a supply shock.

Sometimes you are looking at monetary debasement.

And if you confuse the two, you will misread the whole board.

That is the real inflation question now. Not whether oil jumps another ten dollars. Not whether one more headline sends gold traders into a frenzy. The real question is whether Washington and the Fed are still permitting the monetary conditions that let temporary shocks harden into a lasting inflation regime.

Hanke’s conclusion is clear: America is likely heading toward more inflation, not less. Not because oil rises. Not because fertilizer gets stranded. Not even because war alone makes everything more expensive. His view is that inflation will remain sticky because the deeper monetary backdrop is loosening again. Massive fiscal deficits, the end of quantitative tightening, easier bank regulation, and renewed money supply growth all point in the same direction. The inflation genie, in his view, is not going back in the bottle.