this post was submitted on 20 Mar 2026
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Explain Like I'm Five
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It can, but in a modern capitalist system, inflation has to be weighed up against economic output. It's easy to bring inflation to zero, but that would also result in stagnation, which if not handled properly will result in recession.
Inflation of around 2% annually is considered healthy, as that gives enough economic leeway to invest (note: not necessarily "invest" as in buying stocks. We"re talking about bsinesses investing in upgrading own factories, etc) in a manner that is net positive for an economy, usually resulting in increased employment and wage growth.
The problem is when inflation outpaces wage growth and economic output, that's when it becomes an actual problem. See current state of Russia as an example.
The usual tool to curb inflation is to raise interest rates, so that less money is circulated. This does however come with its own problems, as it squeezes those with loans (most of us), resulting in decreased consumer spending/demand, which tends to slow down the economy, and this too can result in stagnation of not handled properly.
So, what happens if you stop printing money AND increase interest, in other words, handling it improperly? Stagflation - a stagnating economy with inflation still way too high. It's basically the worst of both worlds (cue Hannah Montana theme), and it rarely (if ever) ends well for a country.
I'm not 5 but you gave me a better understanding so thank you.
Sorry but some of this is wrong.
Actual money printing does happen.
It is very much worth clarifying that 'inflation' is a confusing and terrible word to use, because it means different things, in different contexts and theoretical frameworks, and is measured in many different ways.
Are you measuring ... increasings in price levels experienced by consumers?
For... everything? Maybe just food?
If your house appreciates in value... is that, in and of itself, inflation?
Maybe inflation is best measured by the prices paid by manufacturers, retailers, farmers?
Or maybe you're literally measuring the actual amount of money that exists in certain categories of accounts, at any given time?
What follows is mostly focused on the more 'monetary/financial' mechanisms of money, and how they relate to inflation.
When the government wants to sell Bonds, debt, to fund itself... and there is not enough demand from the market?
The central bank 'buys' the debt, by poofing money into existence to do that.
The technical term for this in the US is 'Primary Dealer Takedown'.
Happens all the time, actually.
Or, the central bank can purchase ... essentially stuff that isn't actually worth what people want it to be worth, so that they can remain solvent, not go bankrupt.
Like Mortgage Backed Securities, that are actually based on a bit too many home mortgages that are in foreclosure.
So, the central bank 'buys' those 'assets' from the people that originally owned them... they 'buy' them by poofing into existence the money to do so.
This is called a bailout.
Private banks do not create money by charging interest, not directly.
Private banks accumulate money, by charging interest, and having people who consistently pay them that interest.
Private banks directly create money by loaning out more money than they actually have.
This is moderated by what are called Reserve Requirements.
Basically, if you, a bank, have $10 dollars, and the Reserve Requirement Ratio is 10%, well you can loan out $90 dollars.
$100 in total, you have 10% of that in reserve, $10.
... and those $90 will often be loaned to another bank, who can now loan out $81 dollars. Who can now loan out $72 dollars. Etc.
This is called fractional reserve banking.
A whole bunch of real money, currently being used to pay for physical stuff and things and services, is poofed into existance by private banks, not just the central bank.
Then, well managed banks accumulate more and more money... because they are meant to be recieving constant payments on that money in the form of the interest they charge for those loans.
Yep.
They get to charge interest on stuff they mostly made up out of mostly nothing.
This is called fiat currency, more specifically, debt-based/backed fiat currency.
These are private banks, by the way.
Owned and operated by small numbers of people, who run these banks... to make a profit, ie, accumulate more and more money.
If they do a poor job of selecting people to loan to, too many people fail to pay their obligations... well, more on that later.
There's the total amount of money that actually exists, and then there is the velocity at which it changes hands in some kind of a transaction.
Both of these play into how an economy works.
And also... different sectors of the economy have different amounts of actual money in them, as well as different transaction volumes and paces, ie, velocities of exchange.
And, the effects of monetary inflation are felt at different times, for different actors in different markets.
Did you just get bailed out by the gov?
Excellent, you can now use that money now, before the money itself filters down to everyone else in a particular market sector, and causes a general upward pricing shift.
Think of it like gentrification.
If a bunch of wealthy people move to a cheap area, those wealthy people end up raising prices for all the locals, choking them out of their own neighborhoods.
That kind of logic and process applies to really any economic sector or location... it just looks like oligarchical industry consolidation, creating regional or local monopolies held in a tenuous balance by essentially a cartel of the orgs that finance it all.
It literally directly creates and exacerbates wealth inequality, when you poof a bunch of money into existence, and give it to, not everyone, but instead particular entity or group of entities.
But this all also works backwards as well.
A bank run?
A large company that issued or holds a lot of debt is now going under? Not being bailed out?
A commonly held investment asset is revealed to... not actually be properly pricing in all risks, or demand for it suddenly nosedives?
Well, now everyone acts defensively, pulls their money out, tries to clear out their existing obligations before everything gets locked or otherwise 're-valued' or even wiped out.
This tanks the velocity of money, which can include the rate that banks (and private equity/capital) lend to themselves and other entities, so now, the money supply grows more slowly or may actually contract.
Also, there is no way a 5 year old can understand monetary/finance/economic theory.
Its just too complicated.
Sorry, some things require more fully formed brains to comprehend.