The COVID-19 pandemic unleashed a surge of inflation as consumers spent more, businesses struggled to supply goods and services, and supply chain delays due to shelter-in-place policies reduced production and shipping capacity. Prices for some goods and services jumped dramatically and others saw much smaller increases. Inflation is a complex phenomenon and experts offer several perspectives on what caused the recent surge.
Some economists believe that the increase in inflation was mainly due to cost-push, whereby higher prices for raw materials and labor push up production costs and eventually lead to higher prices for consumers. Others point to demand-pull, whereby people buy more goods and services and companies respond by increasing prices. Still others see a mix of both, or a combination of causes.
There is no simple answer to this question, which is why some of us grew skeptical of simple heuristics that claim to identify the cause of inflation. The truth is that any number of reasons could explain the rise in inflation during and after the COVID-19 pandemic, including a general economic boost from fiscal support packages, consumer spending that exceeded pre-pandemic trends, and supply chain challenges that snarled shipping routes, shut down factories, and left many workers too afraid to work or unable to do so because of school and business closures.
In the case of the COVID-19 surge, research suggests that oil price shocks and global demand shocks accounted for about 65 percent of the variation in inflation across countries over the 2021-22 period, with less significant contributions from interest rate shocks and global supply shocks. Nonetheless, these are just averages, and the role of each may have varied over time.