The common sense definition for an inflationary situation is ‘when too much money chase an inherently limited amount of goods and services’.

The ‘limited amount of goods and services’ part is easy. We live on a finite planet, we have a limited capacity to transform whatever resources we are able to identify into usable goods and services … so…
OK, we can always identify new resources and build new capacity but we cannot do any of this ‘on the spot’. We need time. And, even more importantly, we need to put ourselves to it!

Then ‘who does the chasing’?
After all, money is ‘inert’. It doesn’t do anything if let alone in a drawer. On under the mattress…
In reality, we – buyers and investors, are the true ‘inflationary agents’.
‘But it would be completely stupid to sit on a pile of money when inflation rages! You have to buy something otherwise you’ll loose a lot of value! At least, you need to invest that money…’
This is one of the best examples of a self-fulfilling prophecy!
Indeed. Buying or investing during an inflationary bout is the reasonable thing to do! Yet we need to understand that our actions will, temporarily, exacerbate the very inflation we are trying to ‘tame’.

But where does the excess money come from?!?

Until not so long ago, the sovereign was the only one person who could bring new money to the market.
And their ability to do that was severely curtailed by the amount of bullion available for this task.
In fact, the first major inflationary episode in the second millennium had been fueled by the gold brought back to Europe by the Spanish conquistadors. Which bout of inflation brought about the first major change in the European economic thinking.
“To inspect the country’s soil with the greatest care, and not to leave the agricultural possibilities of a single corner or clod of earth unconsidered… All commodities found in a country, which cannot be used in their natural state, should be worked up within the country… Attention should be given to the population, that it may be as large as the country can support… gold and silver once in the country are under no circumstances to be taken out for any purpose… The inhabitants should make every effort to get along with their domestic products… [Foreign commodities] should be obtained not for gold or silver, but in exchange for other domestic wares… and should be imported in unfinished form, and worked up within the country… Opportunities should be sought night and day for selling the country’s superfluous goods to these foreigners in manufactured form… No importation should be allowed under any circumstances of which there is a sufficient supply of suitable quality at home.” Philip von Hornigk, 1684.

After a while, economy had become ‘complicated’ enough to demand ‘paper money’.
The amount of goods and services produced had become so large – and insufficient bullion was added to the money pool, that prices would have had to shrink if the balance was to be maintained.
Unsustainable! Nobody would have bought anything and everybody would have jealously guarded their precious money while waiting for the prices to fall further. This process is known as ‘deflation’ and is considered even more malign than a decent amount of inflation.
We have to note at this point that ‘paper money’ had been made possible by the advent of the ‘nation’.
This is a rather complicated discussion, for the present purpose it’s enough for me to mention that ‘paper money’ being accepted as ‘tender’ means that the general population has enough trust in the issuer of the bills. That the individual user of the paper money trusts/believes he is part of ‘something bigger’.
In those times, it was the issuer of paper money who practically controlled the amount of money which existed on the market.

Which brings us to the present times.

I’m sure all of you are aware of how “fractional reserve banking” works.

‘Yeah, the banks create money out of nothing!’

Wrong!
For banks to be able to ‘create’ new money, they have to extent credit!
For new money to be created in this way, somebody must walk into a bank with a business proposition.
That somebody might want to buy a house, a car or whatever else. Or that somebody might want to start a business. If that somebody convinces the bank that they is solvent or that their idea is worthy enough, then and only then new money is created!
Money doesn’t appear out of the blue! It is born out of trust. That somebody not only trusts themselves but they are convincing enough to determine the banker to extend that much needed credit!

But wait!
We’ve developed yet another mechanism which churns out money.
The stock market.
After developing the business started with the loaned money, the somebody we’ve been talking about above decides to make an IPO. To sell part of his business to investors. To monetize his initial investment.
Depending on the moment chosen for the IPO – and the economic data in the prospect, the IPO can be a huge success. For ‘somebody’ and for the early buyers. You see, each time the price of the stock goes higher, new money is created. Based more on the ‘market’s expectations’ than anything else…

‘But people who put their money on the financial markets are rational agents! They are experts in their field…’

Yeah, right…
You’re talking about the experts who had put together the collateralized debt obligations debacle…
And many others. Too many others…
Also, you’re talking about the experts who had bought those papers! Who had trusted the expertise of the first batch of ‘specialists’!

Thinkers, from Freud to Kahneman and Ariely, have proven than humans are very good at rationalizing and less so at being truly rational.
That for a market to behave in a reasonable manner, it must preserve its freedom.
That it must be free from ‘bullies’ – individual agents who muster a lot of ‘clout’, and free from any mania.

The 1637 Dutch Tulip Mania is a very good example of what might happen when a market gets obsessed with something.
When too many people – not even a majority, forget about the fact that economy (oikonomia) is about making ends meet and that getting rich may be a nice consequence but is a terrible goal.

‘OK, nice try. But what about inflation?’

We have an inherently limited amount of goods and services.
A relentless mechanism which churns out money.
Meanwhile, some of us obsess about their need to conserve the money denominated portion of their stashed away fortunes.

Inflation is nothing but another mechanism.
Which re-balances the market.
Piece-meal – adjusting for daily changes, in normal times. When things evolve ‘freely’.
Suddenly when the market – the people who ‘man’ the market, find out about ‘the dark side of the moon’.