Where does inflation actually come from?

"Prices went up" has three classic engines. Telling them apart is what separates reading the news from understanding it — because each engine calls for a different response from the central bank.

Engine 1: too much demand

Demand-pull inflation: spending power grows faster than the economy's ability to produce. Too much money chasing too few goods — queues form, sellers raise prices because they can. Classic triggers: booms, generous stimulus, credit expansions. This is the engine central banks know how to fight: raise rates, cool the spending.

Engine 2: costlier supply

Cost-push inflation: producing things gets more expensive — energy spikes, supply chains snap, key materials go scarce — and producers pass the bill to you. This engine is nastier for policymakers: raising rates doesn't refill a pipeline or un-snap a supply chain; it can only crush demand enough to offset it, which hurts.

Energy is the input that reaches almost every price, which is why an oil chart is the closest thing to a picture of this engine:

Engine 3: the self-fulfilling spiral

The sneakiest one: expectations. If workers expect 8% inflation, they demand 8% raises; firms expecting costlier wages raise prices in advance; everyone's expectation becomes everyone's reality. This is why central bankers talk so much about expectations staying "anchored" — once the spiral starts spinning, stopping it costs recessions. The whole theater of credibility you'll meet in the next unit exists to keep this engine off.

Real episodes mix engines

The 2021–2022 global inflation wave began mostly as engine 2 (pandemic supply chains, then an energy shock) layered on engine 1 (reopening demand plus stimulus) — with central banks hiking hard precisely to keep engine 3 from igniting. Most big inflations are cocktails; the labels help you see the ingredients.

Try it now

1. Classify: a war doubles oil prices · a government mails every citizen €2,000 · unions negotiate automatic cost-of-living raises. Which engine is each?
2. One sentence: why is cost-push harder for a central bank to fight than demand-pull?
3. Scenario one need not stay hypothetical. Find the 2021–2022 stretch on the oil chart below and Measure it from low to high. The ratio between those two prices is the size of the shock this lesson calls engine 2 — and it arrived without any central bank deciding anything.

4. Then find a second stretch, anywhere on the chart, where the same thing happened and nobody remembers it. Engine 2 is not rare; it is only occasionally famous.