Unpacking Post-Pandemic Inflation: The Dominance of Demand Over Supply
Domenico Giannone and Giorgio E. Primiceri, in this paper, explore the causes behind the surge in inflation following the COVID-19 pandemic, focusing on the United States and the Euro Area. The authors use a Bayesian Vector Autoregressive (BVAR) which provides a structured framework to analyze the complex dynamics of inflation by separating the influences of demand and supply shocks. Here are the main findings from the paper:
- Demand-Driven Inflation: The study concludes that the post-pandemic inflation was predominantly driven by unexpectedly strong demand forces, rather than supply shocks. This was observed in both the United States and the Euro Area.
- Role of Supply Shocks: Although adverse supply shocks did occur and constrained economic activity, their impact on inflation was less significant compared to demand forces. These supply shocks included disruptions in production and supply chains, but they were not the primary drivers of the inflation surge.
- Economic Recovery Dynamics: At the onset of the pandemic, both economies experienced significant negative supply and demand shocks, which depressed economic activity. As recovery began, aggregate demand rebounded more rapidly than anticipated, outpacing aggregate supply. This imbalance led to inflationary pressures.
- Policy Implications: The paper suggests that the rapid recovery in demand was fueled by a combination of expansionary fiscal policies, strong pent-up demand following the lifting of pandemic restrictions, and loose monetary policies. The findings imply that central banks, such as the European Central Bank, faced challenges in managing inflation without hampering economic recovery.
- Similar Inflation Patterns: The inflation patterns in the US and the Euro Area were remarkably similar, with US inflation peaking in the second quarter of 2022 and Euro Area inflation following a similar trajectory with a six-month delay. This similarity suggests common underlying factors driving inflation across these regions.
The drivers of post-pandemic inflation
Authors: Domenico Giannone, Giorgio E. Primiceri
From: IMF, Northwestern University
The disinflation progress
François de Soyres, Grace Lofstrom, Mitch Lott, Chris Machol, and Zina Saijid evaluate the disinflation progress in advanced economies following the COVID-19 pandemic.
- Core Inflation Components: The analysis reveals that while core goods inflation has largely returned to pre-pandemic levels due to the normalization of supply chains and a shift in consumer demand from goods to services, core services inflation (excluding housing) remains sticky. This stickiness is linked to domestic wage developments and country-specific factors, and it poses challenges for achieving inflation targets, especially in the euro area and the UK.
- Disinflation Progress: Progress in reducing inflation has been uneven across countries and sectors. Notably, services inflation has been more persistent, and there is a notable dispersion in how widespread inflation is across categories. For instance, inflation pressures are more widespread in the U.S. and the U.K. compared to Canada and the euro area.
- Monetary Policy Implications: The paper suggests that navigating the final stages of disinflation will require further cooling of nominal wage growth, potentially leading to slower economic growth. Some central banks have begun easing policy rates, but the approach remains cautious and data-dependent, with no pre-commitment to a specific policy path.
Disinflation Progress: A Comparison of Advanced Economies
Authors: François de Soyres, Grace Lofstrom, Mitch Lott, Chris Machol, Zina Saijid
From: Board of Governors of the Federal Reserve System
