On a radio show, I argued for halting the growth of money and credit. Two callers told me the argument was pointless, because Nigeria’s inflation is driven by costs, not by money. It’s a common reply, and it mixes up two different things: a rise in particular prices, and a fall in the purchasing power of money. A higher production cost can certainly push up the price of one good. It doesn’t explain how prices across the whole economy end up rising together.
Costs don’t create money
When prices rise, the first question usually asked is, “which cost went up?” A better one is: “what happened to money?”
Say oil becomes scarce and its price jumps. Buyers now put more of their existing spending into oil, but the shortage hasn’t added a single unit of currency to the economy. Every naira spent on pricier oil is a naira not spent on something else, so other businesses see weaker demand and must adjust their prices, output and investment. That is a shift in relative prices. Oil gets more expensive compared with other things, and the money simply moves around.
“But fuel got more expensive everywhere”
That’s true, and it’s a fair point. Dearer fuel makes transport, farming and manufacturing costlier, so many prices can rise in many countries at once. But it doesn’t settle what caused the general rise. Two things can be happening together: a fuel shock making fuel-heavy goods pricier relative to everything else, and monetary expansion giving people more nominal money to bid prices up across the board. Pointing at the fuel shock doesn’t tell us how much of the overall increase belongs to each.
The wage-price spiral
Wages work the same way. If workers get a 20% raise and the money supply stays put, firms can try to pass the cost on, but customers haven’t received 20% more money to pay the higher prices. Sales fall, margins shrink, and firms respond by cutting output, automating, delaying investment or hiring fewer people. Higher wages can do real damage or real good without producing general inflation.
Costs are prices too
Production costs are themselves prices. Steel, wages, freight and electricity are all prices, so calling them the root cause of other prices only pushes the question back a step. Why did steel go up? Why did wages rise? The answers might involve scarcity, demand, productivity, regulation, taxes, monetary conditions or expectations. Prices are tied together all along the chain, and one input getting dearer can ripple outward, but it doesn’t automatically lift the price of everything.
Supply shocks are real
None of this means supply shocks don’t matter. An oil shortage makes petrol dearer, a bad harvest makes food dearer, and a disrupted factory makes its products dearer. The point is what these events do. They explain which prices rise and by how much, but they can’t pay for a higher general level of prices. If the central bank then expands money or credit to cushion the blow, the shock can turn into a broader and more lasting rise in prices. In that case, the supply shock explains where the pressure started, and the monetary expansion explains why it spread and stuck.
In conclusion
Costs can change prices, but they can’t create money. Oil can run short, labour can get dearer, taxes can climb and supply chains can break, and none of it adds a single unit of currency. A general, sustained rise in prices needs more purchasing power relative to how much people want to hold.
I’m not claiming every price rise comes from monetary expansion, or that every expansion lifts every price. Prices move for countless reasons all the time. The claim is narrower: a higher cost of production, taken alone, doesn’t explain a general inflation. Cost-push theory mistakes a consequence for a cause, so rather than asking only why particular prices rose, we should ask what happened to the quantity of money.
Econ Bro (@EconBreau and @EconBreau2 on Twitter/X) is a Nigerian Austrolibertarian economist and an apprentice at the Mises Institute. Under the organisation name “The Freedom Institute” he teaches individual liberty, personal responsibility, private property rights, free markets, and sound money to mostly young people across Nigeria. Econ Bro is an Associate of the Free Market Foundation.
