Causes of today’s inflation

The causes of today’s inflation

In this paper Stiglitz and Regmi argue that contrary to popular belief, current inflation is largely driven by supply shocks and sectoral demand shifts, and not by excess aggregate demand. A sectoral breakdown of inflation, reveals that the main drivers of the current inflation in the US are:

• Supply chain interruptions the economy has experienced, high food and energy prices as well as shortage of microchips for automobiles .
• The large pandemic-induced shifts in demand, such as those associated with housing: a significant increase in rents largely a result of demand shifts in the location and type of housing desired.
• Market concentration, which has generated greater market power and enabled firms to increase the amounts by which they mark up costs.

Monetary policy, then, is too blunt an instrument because it will greatly reduce inflation only at the cost of unnecessarily high unemployment, with severe adverse distributive consequences. This paper presents a variety of fiscal and other policy measures that hold out the prospect of having a more significant effect on inflation.

The Causes of and Responses to Today’s Inflation
Authors: Joseph E. Stiglitz, Ira Regmi
From: Columbia University, Roosevelt Institute

The COVID relief should have been done better

L. Randall Wray in this commentary argues that inflation might not have been an issue today if the fiscal response during COVID was  better calibrated :

The important point is that [COVID] relief should have been focused on restoring and improving the supply side of the economy rather than on restoring demand in the face of supply-side shortages. This could have mitigated inflation pressures and eliminated the pressure on the Fed to raise interest rate targets, thereby reducing the probability of entering a period of stagflation with the looming possibility of another global financial crisis.

The Causes of Pandemic Inflation
Author: L. Randall Wray
From: Levy Economics Institute