The inflation tax is caused by central banks financing government deficit spending. Inflation rose in the United States at such an increased pace during the Vietnam War that it broke the gold standard and caused a trend inflation rate above the zero trend of historic metallic regimes. The higher inflation trend of the fiat era put in place fluctuations in positive inflation instead of the more volatile price level changes of the metallic standards, with inflation during war and deflation after war.

The bank panics of the nineteenth century and the Great Depression brought about the establishment of the Fed and the FDIC. Today the inflation rate is tied closely by Fed policy to the threat of bank panics for those outside the FDIC. As the Fed buys Treasury debt and mortgage-backed securities, pays Treasury seigniorage to the private banking sector, prohibits positive real interest in money markets, suppresses inflation by keeping the newly printed money as reserves and attempts to provide sufficient liquidity for an ever more sprawling financial system, discerning the link between money and inflation is a challenge.

Although it has been said that inflation is no longer tied to the money supply, in fact the conflation of money and banking policy by the Fed simply makes the connection harder to uncover. The problem is not with the quantity theory of money. It has long shown the common sense of how the aggregate price level rises in tandem with the money supply.

There are important nuances. The price level rises more rapidly than the money supply because higher inflation rates normally increase interest rates and lower real money demand. And increases in economic growth can lower inflation, as more money supply is demanded for growth.

But the 2021 inflation increase had been declared by Ip (2021) as a “bout of inflation that defies old models”. Supposedly this inflation episode cannot be explained by the centuries-old quantity theory. “Modern monetary theory” declares the quantity theory of money to be dead. Nonetheless, it omits, or does not seek to understand, that the increase in money by the Fed was sterilized by the Fed's surge in excess reserves after 2008, which was enabled by its paying interest on excess reserves