What Actually Causes Inflation (and who gains from it) … I made a post two weeks ago in which I explained that the popular view of inflation (wherein it is caused by money growth) depends critically on assumptions that do not hold in the real world. Money comes into existence when someone adds it to her portfolio of assets. This occurs either when she borrows money (which creates new cash from reserves) or sells securities to the Federal Reserve (which injects new cash into the system). Neither of these scenarios allows the central bank to increase the supply of money beyond demand, the story told by those in the money growth ==> inflation camp. Instead, inflation happens first. This then means that agents need more cash for transactions, leading them to borrow more or sell government securities to the Fed. Thus, the money growth accompanies inflation, but it does not cause it.