Inflation: Who got it right, and why it matters to you
Peter McGahan
Monday 29th September, 2025.
EVER wondered why some inflationary talk feels like you are sucking a sweet with the wrapper still on it? Well…
You’ll maybe have heard of two people looking from either side of a number 9 on the table - one will say it’s a 6. When we look at things from ‘who is right’ it’s not going to yield great results, but a fight. When we look at ‘what’s right’, it’s a journey/conversation to discovery, and potentially that it’s actually a tadpole.
In economics the rival views between the mainstream and the heterodox (I’ll explain) of how inflation works aren’t just academic: they shape policies which ripple through mortgage rates, business costs, pay packets and savings.
So, who’s been more right in the big moments? Well…
Mainstream economics, especially the kind you’ll find in central banks, likes its models tidy. They assume the economy tends to balance itself out, like a seesaw which settles itself. Inflation, in that world, mostly comes from wages rising too fast. Debt, dodgy lending, or what big companies do with their pricing? Often brushed aside.
Heterodox economics, by contrast, starts in the weeds. It sees an economy tangled up in credit flows, power dynamics, and supply chains which jam at the worst moments. In this view, banks don’t just shuffle money, they create it. And some businesses have enough muscle to raise prices simply because they can. It’s messier, yes, but often more like the world we live in.
Mainstream models missed the 2008 crisis. Heterodox voices, by contrast, had been warning for years. Steve Keen and others used models tracking private debt and credit flows, showing how financial instability builds long before it bursts. These models didn’t just forecast the crash; they explained its mechanism.
It’s the difference between early warning and nasty surprise.
In 2021-2023 the mainstream (including the Fed) called inflation “transitory.” But as prices proved stickier, especially in energy, rent, and food, they pivoted. Central banks hiked rates aggressively. Inflation has since fallen: US CPI is down from 9.1 per cent (June 2022) to c2.9 per cent (Aug 2025); UK inflation sits at c3.8 per cent.
Heterodox thinkers had diagnosed the problem earlier. Joseph Stiglitz highlighted supply shocks and energy prices. The Bank for International Settlements (BIS) showed how money supply growth, often ignored by central banks, signalled the coming surge. IMF analysis found corporate profits, not wages, were key inflation drivers in Europe.
Textbooks long claimed banks “lend out deposits.” In 2014, the Bank of England officially corrected that: banks create money when they issue loans. This aligns with heterodox economist Richard Werner, whose credit-creation model was once fringe and is now orthodoxy.
Mainstream models rely on the Phillips curve, the idea that low unemployment fuels inflation via wage growth. But in 2021–22, inflation surged even as wage growth lagged.
Heterodox economists pointed instead to mark-ups, supply shocks, and sectoral bottlenecks, more consistent with what happened. Only later did mainstream research start to account for these. Heterodox, again, saw more of the picture.
So, if your economic forecasts ignore credit, supply shocks, or business pricing power, you're flying blind. For businesses, that can mean mispricing risk. For households, it means surprise jumps in rent, food, or loan repayments.
Rate hikes helped cool inflation, but they hurt borrowers, slow growth, and widen inequality. Heterodox alternatives, like targeted subsidies, price controls, or windfall taxes, may avoid some of that pain, though they’re harder to implement.
In the real world, rent, food, and energy weigh more heavily on lower-income households. Profits rose for some firms even as real incomes fell. Understanding these dynamics is key to making fair and effective policy at a central bank.
In high-inflation regimes, ignoring money supply is risky. Credit booms, private debt loads, and financial fragility remain critical indicators, both for inflation and for crises.
What should we keep from each camp? From mainstream economics: credible central banks, flexible inflation targets, and attention to expectations still matter.
From heterodox: build models which reflect the real economy, where credit creates money, businesses have power, and supply chains can break. Use more than just the interest rate lever. Design tools which ease pressure without deepening inequality.
Heterodox economists better predicted both the 2008 crisis and the post-COVID inflation surge. Mainstream tools, especially rate hikes, ultimately calmed inflation, but at a price.
Simple models help you think straight, but, if they leave out credit, the pace of credit, supply chains or pricing power, they won’t help you much when the bills land. In today’s economy, understanding inflation’s causes matters more than ever.
6, 9, or tadpole?
If you have a financial query, please call 01872 222422 or if you would like a complimentary inflation guide, please email info@wwfp.net
Peter McGahan is the Chief Executive Officer of Independent Financial Adviser firm, Worldwide Financial Planning. Worldwide Financial Planning is authorised and regulated by the Financial Conduct Authority.
