After several decades of relatively low and stable inflation, in 2021 the US experienced a sharp rise in the pace of price increases. The annual inflation rate, as measured by the Consumer Price Index, was 1.7 percent in February 2021 but rose to more than 5 percent in June 2021. It continued rising for another year, peaking at about 9 percent in June 2022.
The rise in the inflation rate has been attributed to many factors. The US response to the COVID-19 pandemic included a series of federal initiatives, notably the CARES Act and the American Rescue Plan, which collectively authorized roughly $5 trillion in government spending. These programs contributed to strong consumer and business demand, which tightened labor markets (between mid-2021 and early 2022 the ratio of job vacancies to unemployed workers doubled), putting upward pressure on wages and prices.
Rising commodity prices and supply chain disruptions were the principal triggers of the recent burst of inflation. But, as these factors have faded, tight labor markets and wage pressures are becoming the main drivers of the lower, but still elevated, rate of price increase.
On the supply side, supply chain disruptions had an important inflationary impact, particularly in 2021 and 2022. The auto industry is a case in point. US auto production dropped from 11.7 million vehicles in July 2020, roughly the pre-pandemic rate, to less than 9 million in the fall of 2021, reflecting shortages of computer chips and other inputs. The combination of strong demand and supply chain bottlenecks led to further pressure on prices, particularly on prices of durable goods. Rising prices of food and energy added importantly to inflation. Notably, the crude oil market was disrupted by the Russian invasion of Ukraine in early 2022. The price of West Texas Intermediate crude oil rose from less than $70 per barrel in the late summer of 2021 to more than $100 per barrel for most of the period between March and July of 2022, pushing up gasoline prices and the costs of many industrial inputs.
The relative importance of these factors, and others, in contributing to US inflation that began in mid-2021 is an open question. InWhat Caused the US Pandemic-Era Inflation?(NBER Working Paper 31417),Olivier J. BlanchardandBen S. Bernankestudy the historical comovement of wages, prices, and inflation expectations in an effort to measure the relative contributions of the sources of the recent US inflation shock. They estimate the relationships between price inflation, wage inflation, commodity price shocks, shortages, and labor market tightness over the period from 1990 to the start of the pandemic, and then use their estimates to simulate the inflationary effects of the various shocks that buffeted the US economy from the beginning of 2020 to early 2023.
The researchers find that energy prices, food prices, and price spikes due to shortages were the dominant drivers of inflation in its early stages, although the second-round effects of these factors, directly through their effects on other prices or indirectly through higher inflation expectations andwage bargaining, were limited. The contribution of tight labor markets to inflation was initially quite modest. But as product market shocks have faded, the tight labor market and the resulting persistence in nominal wage increases have become the main factors behind wage and price inflation. This source of inflation is unlikely to recede without macroeconomic policy intervention.
— Leonardo Vasquez
FAQs
Globally, as in the United States, pandemic-era inflation was due primarily to supply disruptions and sharp increases in the prices of food and energy; however, the inflationary effects of these supply shocks have not been persistent, in part due to the credibility of central bank inflation targets.
What is causing the inflation pandemic? ›
So, from this research, the authors find that three main components explain the rise in inflation since 2020: volatility of energy prices, backlogs of work orders for goods and service caused by supply chain issues due to COVID-19, and price changes in the auto-related industries.
Why is inflation so high in the US? ›
Generally speaking, inflation can be caused by a number of factors. The recent surge in inflation has been driven, at least in part, by supply chain issues, a housing crisis, pent-up consumer demand and economic stimulus from the pandemic. » Learn more: When will inflation go down?
What are the five main causes of inflation? ›
The 5 causes of inflation are increase in wages, increase in the price of raw materials, increase in taxes, decline in productivity, increase in money supply.
Does printing money cause inflation? ›
Does Printing Money Cause Inflation? Yes, "printing" money by increasing the money supply causes inflationary pressure. As more money is circulating within the economy, economic growth is more likely to occur at the risk of price destabilization.
What is causing inflation in 2024? ›
In 2024, several factors may contribute to inflationary pressures, including pent-up consumer demand, rising commodity prices, and ongoing supply chain disruptions.
Who is responsible for inflation? ›
More jobs and higher wages increase household incomes and lead to a rise in consumer spending, further increasing aggregate demand and the scope for firms to increase the prices of their goods and services. When this happens across a large number of businesses and sectors, this leads to an increase in inflation.
Does the president control inflation? ›
A president's actions in office—such as tax cuts, wars, and government aid—can affect prices and the economy overall. The president plays a significant role in deciding how to respond to high inflation or stimulate the economy during a slowdown.
What caused the great inflation in the US? ›
While economists debate the relative importance of the factors that motivated and perpetuated inflation for more than a decade, there is little debate about its source. The origins of the Great Inflation were policies that allowed for an excessive growth in the supply of money—Federal Reserve policies.
What is the number one cause of inflation? ›
As for current inflation, the main contributing factors include the increase in the money supply, supply chain disruption and fossil fuel policies.
Inflation allows borrowers to pay lenders back with money worth less than when it was originally borrowed, which benefits borrowers. When inflation causes higher prices, the demand for credit increases, raising interest rates, which benefits lenders.
Does government spending cause inflation? ›
The government could also stimulate the economy by increasing spending on infrastructure projects. The result could be an increase in demand for goods and services, leading to price increases. Just as expansionary fiscal policy can spur inflation, so too can loose monetary policy.
What is the Phillips curve in economics? ›
What Is the Phillips Curve? The Phillips curve is an economic theory that inflation and unemployment have a stable and inverse relationship. Developed by William Phillips, it claims that with economic growth comes inflation, which in turn should lead to more jobs and less unemployment.
What are the causes and effects of demand pull inflation? ›
Demand-pull inflation happens when demand for goods and services outweighs supply, which remains stable or drops. Demand-pull inflation results in higher prices. A low unemployment rate is unquestionably good in general, but it can cause inflation because more people have more disposable income.
Does unemployment cause inflation? ›
Key Takeaways
In times of high unemployment, wages typically remain stagnant, and wage inflation (or rising wages) is non-existent. In times of low unemployment, employers typically need to pay higher wages to attract employees, ultimately leading to rising wage inflation.
What is the inflation rate in the US today? ›
US Inflation Rate is at 3.36%, compared to 3.48% last month and 4.93% last year. This is higher than the long term average of 3.28%.
