Inflation and What Drives It in Modern Economies
Economic theory does not offer a single explanation for the causes of inflation. Believing that inflation always has the same source contradicts history and fails to yield fair, effective solutions. The article originally titled “Incoming inflation” described a 9.4 percent year-over-year rise on November 4 of the prior year. It noted that the August price increases were led by energy, housing and water, then by 8.5 percent in transportation, with other sectors staying below 2 percent. The electricity scandal topped headlines, though not in the moment of Aznar’s privatization. There was also discussion about competition between renewable and fossil energies as a potential inflation driver, while the People’s Party proposed tax cuts without clarifying their purpose. Oil and gas producers were described as limiting output to sustain high prices and a bullish market.
As with any trade dynamic, rising demand tends to push up the prices of goods and services. Without balancing mechanisms or social negotiation, the factors behind inflation become more persistent. The author argues that inflation began building earlier than some observers admit, and that the war in Ukraine has intensified the problem. A party spokesperson maintained that tax reductions are the central solution, yet the piece emphasizes that economic theory does not pinpoint a single cause of inflation. It also critiques liberal currents for touting tax avoidance, while pointing to OECD data showing that nations with higher income tax burdens can still be prosperous, with high GDP per capita and strong employment and productivity metrics. The claim that regions like Madrid demonstrate tax relief as a path to better performance is challenged by the view that core services—health, education, social services, infrastructure, and aid to vulnerable groups, including businesses—are financed by the central government. Taxes fund the welfare state by ensuring access to essential services. Reducing income taxes could translate into greater consumer spending but may also lift inflation if public investment in education and health is curtailed. The piece argues that a responsible opposition would specify which taxes to cut and which public expenditures to reduce, rather than echoing a blanket call to abolish taxes. A government program, the article contends, must address the limits of oligopolies and avoid simplistic liberal slogans.
Public administrations account for a substantial share of GDP and, contrary to common belief, public spending can produce higher final revenue for the economy under certain conditions. There is a perceived multiplier effect from fiscal policy and budgets, which steer economic activity within a given year. No government should outsource its budget and fiscal policy to the opposition as the price of agreement. Government spending puts more money in citizens’ hands, not less, and the notion that the state is merely taking money away is inaccurate. The root causes of inflation, the article suggests, lie in monopolies and shortages that enable price increases for goods, services, or inputs. Tax reductions that erode essential services like education, health care, and social support can inadvertently restrain long-term economic vitality. In short, tax policy should be paired with targeted investments to sustain welfare and growth.
Moreover, tax cuts can have a contractionary, recessionary impact if they are not paired with revenue-raising measures or smart spending. A balanced approach is needed, one that asks for contributions from the most affluent groups and large corporations to support redistributive aims and public goods.
Warren Buffett, one of the world’s wealthiest individuals, has argued that the wealthy should shoulder a larger tax burden to fund society-wide priorities. This perspective underscores the debate about how taxes, spending, and policy choices intersect to shape inflation, growth, and equality. [Citation: OECD data]