Fundamentals

Inflation and the Rule of Law: Why Predictability Matters

By Daniel Sardá · Published on September 12, 2026

8 min read1,567 words

The connection between inflation and the rule of law is not that good laws eliminate price increases. It is that a predictable currency and public rules help people save, make contracts, and plan.

Promising today to make a payment a year from now seems simple. Someone rents a home, a business finances a machine, or a family sets aside part of its income for future tuition. Each arrangement uses amounts stated in money. But those amounts can coordinate plans only if the people using them can form a reasonable expectation of what they will buy when payment comes due.

That is where inflation and the rule of law meet. Inflation can make the purchasing power of a nominal amount uncertain; the rule of law seeks to subject public power to known, general, and reviewable rules. They are different matters, but they touch on a practical need: predictability. Without it, saving, calculating costs, and taking on long-term obligations become harder.

The connection does not justify an automatic explanation. A legal order with strong safeguards does not, by itself, set the inflation rate, and a change in prices is not necessarily a violation of rights. Understanding the relationship requires separating the concepts before connecting them.

Two different problems that meet in everyday life

According to the Bank of Spain, inflation is a broad and sustained increase in prices. When it occurs, the same sum of money buys fewer goods and services: its purchasing power falls. This does not mean every price rises at the same pace or every household experiences the same effect. A person’s consumption basket, income, savings, and debts all matter.

The rule of law, in turn, is not simply the existence of many laws. In the United Nations formulation, it includes legality, equality before the law, legal certainty, checks on power, and the prevention of arbitrariness. Put plainly, people should not have to rely on shifting, secret, or capricious decisions to know which rules govern their lives and property.

A currency that unexpectedly loses purchasing power and authorities able to alter rules without limits are not the same phenomenon. Yet each can make it harder for people to calculate what they will truly receive in exchange for their work, savings, or a contract.

Key idea: Inflation concerns money’s purchasing power; the rule of law concerns how public powers are exercised and limited. Their connection lies in the ability to make plans using reasonably reliable rules and reference points.

Not every price increase is inflation

This distinction prevents common mistakes. If a frost reduces the coffee harvest, coffee may become more expensive. That change conveys information: less supply is available relative to demand. The price of an airline ticket, a home in a particular neighborhood, or a highly sought-after service can also change. These are movements in relative prices; they indicate changing conditions in a particular good or market.

Inflation is different: it broadly affects the price level and therefore the purchasing capacity of the monetary unit. Confusing the two leads to the conclusion that every variation must be corrected through public power. But relative prices serve an informational function: they guide consumers and producers about scarcity, preferences, and alternative uses.

For that reason, price stability does not mean every price tag must stay fixed. A dynamic economy needs some prices to change. What matters for general calculation is that money retain reasonable predictability, not that every signal of a real shift in supply or demand be eliminated. For a fuller account of the concept and its effects, see what inflation is and why it destroys purchasing power.

The causes of sustained inflation also require careful analysis. Aggregate demand, costs, supply shocks, expectations, and the monetary framework may operate differently depending on the context. Reducing them to a single phrase prevents an understanding of the problem.

When a fixed figure no longer represents the same sacrifice

The point of contact with law is especially clear in contracts. Suppose a loan provides that a fixed nominal sum will be repaid in twelve months. If general inflation during that year is higher than the parties expected, the borrower pays the agreed figure, but that figure may buy less than it did at the outset. The real burden of the debt has changed.

That does not mean the borrower always wins or the lender always loses. The outcome depends on many details: the interest rate, the term, whether indexation clauses apply, the parties’ incomes, and when the agreement was made. Someone holding cash or earning a wage that adjusts late may face a different loss of purchasing power from someone with fixed-rate debt.

The central point is more modest and more useful: unanticipated inflation creates a gap between the number written into an obligation and the economic value that number represents. Alejandro Lagos Torres’s academic analysis of inflation, law, and monetary trust highlights the importance of payment obligations in thinking about this connection, without turning that approach into proof of a single cause behind all inflation.

Key idea: Paying the same nominal sum does not guarantee transferring the same purchasing power. That is why the term, interest, and contractual clauses matter as much as the principal amount.

The effect also reaches saving and business calculation. A person who holds money for a future purchase must estimate what it will buy; an entrepreneur compares present costs with expected revenue. Inflation’s effect on purchasing power is not exhausted by a statistic: it shapes the dispersed decisions of households, workers, lenders, and businesses.

Public rules for trust that does not depend on favor

A free society cannot eliminate every uncertainty. There are poor harvests, innovations, changing preferences, and risks no law can foresee. The contribution of the rule of law is different: it reduces uncertainty created by the arbitrary exercise of power.

General, public rules make it possible to know in advance which procedures apply, challenge decisions, and seek protection for rights. The independence of those who decide disputes and the possibility of reviewing state action matter because a legal promise is worth little if it changes selectively when it becomes inconvenient to those in power. The rule of law and individual liberty provides a broader framework for this relationship.

In monetary matters, this ideal invites questions about the transparency of rules, the clarity of institutional authority, and effective limits on discretion. A public decision can affect the contracts, deposits, and expectations of millions. The more opaque, unpredictable, or selective its making, the harder it is for citizens to tell a stable rule from a temporary decision.

This concern is consistent with a classical liberal perspective: property, contract, and personal autonomy require an environment in which individuals do not depend on the permission or changing will of authorities. It is not about treating an institution as sacred or denying that policies must respond to real circumstances. It is about requiring power that affects other people’s plans to operate under limits, public reasons, and checks.

Key idea: The rule of law does not promise that the future will be cheap or stable. At its best, it promises that public decisions should not depend on arbitrariness or catch some people by surprise in order to favor others.

Strong institutions do not replace monetary explanation

It is important to avoid an excessive conclusion here. Legal certainty may make expectations more reliable, but it does not replace analysis of monetary policy, supply and demand, or economic shocks. A constitution or banking law is not, by itself, a mechanical guarantee of price stability.

Likewise, a technically capable monetary authority is not enough if the rest of the public rules allow arbitrary changes to property, contracts, or access to justice. Trust is formed on several levels: the expected value of money, the quality of available information, and the ability to defend rights when conflict arises. What monetary policy is, how it works, and its limits helps examine the first level without confusing it with all the others.

Nor is it right to use the word “legal” as a synonym for just or predictable. A measure may be written down and still be retroactive, selective, or inadequately reviewable. The rule of law demands more than the form of a rule: it requires generality, publicity, and mechanisms that prevent power from becoming mere will.

Predictability as a practical good

The relationship between inflation and the rule of law is clearer once we stop looking for one cause or one institution that can save everything. Inflation erodes the purchasing power of nominal amounts and can unexpectedly alter the real value of savings, payments, and debts. The rule of law reduces another source of insecurity: the possibility that the rules organizing those exchanges are arbitrary or change without safeguards.

Both matter because people live by plans: taking a job, lending money, buying a home, starting a business, or keeping resources for a future need. A predictable currency and public rules do not eliminate risk, but they make risk more visible and open to discussion, rather than silently shifting it through figures whose meaning dissolves or decisions no one can foresee.

That is the careful connection: not to promise that institutions solve all inflation, but to recognize that monetary trust and legal certainty reinforce one another when power has limits and commitments can be assessed against a reasonably stable reference point.