After years of low inflation, the COVID-19 pandemic produced a surprise surge that surprised many economists and public finance experts. We asked Harvard Kennedy School alumni with deep economic expertise—including those who have held senior federal government roles—to share their perspectives on the underlying issues and appropriate response.
One explanation is that the inflation surge reflects price spikes linked to the pandemic, such as volatility in energy prices and backlogs of work orders for goods and services caused by supply chain disruptions. This type of inflation erodes consumer purchasing power and can lead to household belt-tightening and pessimism about the economy. The surge may also be a result of companies increasing prices to cover higher costs.
Other economists think the inflation surge reflects a generalized increase in demand that has lifted prices across sectors. They point to the global commodity price shocks, the shift in demand during the pandemic toward goods from services, and the kinks in reopening contact-intensive service sectors.
Those developments, combined with higher labor market activity and more generous fiscal and monetary support, pushed inflation up globally. The authors estimate that the effect of the global drivers is equivalent to an additional 0.35 percentage point in the rate of inflation in the United States.
Overall, the authors find that oil price and global demand shocks account for a greater proportion of variation in the world’s inflation than did global supply shocks and interest rate shocks during the 2001-22 period they studied. Their findings suggest that policy makers need to consider alternatives to the current approach to managing inflation, such as more expansive fiscal and monetary support, or tighter labor markets.