Economics textbooks tell us that demand-pull inflation, a rise in aggregate demand, together with nearly full employment, is the most commonly accepted theory of inflation.
Of course, there are also cost-push theorists who see powerful unions demanding wage increases without any excess demand for labour that might generate inflation as the issue.
By and large, the most common belief about inflation is a combination of both forms.
The American journalist Henry Hazlitt wrote erroneous books on the topic of price increases, urging a return to the gold standard if they were to be tamed. These were enthusiastically taken up and promoted by libertarians who, also relatively clueless on the topic of inflation, blame government mismanagement for instigating both forms.
Curiously absent in all analyses is the escalation of land prices. The Earth has existed for more than 4 billion years; it had no cost of production, but when humans congregate at a location the phenomenon of land rent arises at those locations.
We can either capture that pubicly-generated rent publicly, or else allow it to be privatized by individuals. We do the latter, allowing land rent to be privatized and capitalized into locational prices. This means that we need to raise arbitrary taxation to withdraw money from the system and ‘protect the currency’. However, this is consigned to abysmal failure because of the deadweight costs generated by taxes. There is nonesuch with public capture of the economic rent of land.
“Australia’s Future Tax System” (‘The Henry Tax Review’) advocated greater public capture of land rent by means of an all-in land tax which would be more than offset by abolition of some 100 inefficient taxes. As mentioned, these currently inflate prices by being passed off into costs. To date, however, the recomendations of The Henry Tax Review lie dormant.
Accordingly, Australia has seen its land prices increase at an average rate of 9.25% per annum since 1984. Taxes and land prices: there’s your truly destructive cost-push inflation devaluing the currency and increasing prices of good and services. There, also, are the excessive land prices, much of which in the next few years, in the absence of public policy action, will be significantly destroyed in a depressionary scenario. But, no, in neoclassical economic terms, we simply have a “supply problem” with excessive land prices, and any economic convulsion will simply be “the natural business cycle” in action.
Land price (and tax) inflation is that which is completely ignored in all neoclassical economic investigations. Land, which will outlast us all, costs businesses and individuals excessively because we have equated and conflated land rental income with the incomes from produced capital.
Current ignorance of the role of land prices mocks all inflationary analyses.