Milton Friedman famously said: “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than output.” This is what we are experiencing, and it is due to the Federal Reserve's policy since 2008 of buying trillions of dollars of Treasury debt to keep interest rates low and at the same time paying banks to keep reserves at the Fed.
In the past, when the federal government ran a deficit and sold bonds, the Federal Reserve monetized the federal debt by purchasing the bonds. This would add to the reserves of banks, and banks would lend these reserves out. These loans resulted in an increase in checking accounts, therefore increasing the money supply and resulting in inflation. Thus, the adage that federal government deficits lead to inflation.
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