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What's Causing Accelerating Inflation: Pandemic or Policy Response?

Author

Listed:
  • Yeva Nersisyan
  • L. Randall Wray

Abstract

This paper examines the recent increase of the measured inflation rate to assess the degree to which the acceleration is due to problems created (largely on the supply side) by the pandemic versus pressures created on the demand side by pandemic relief. Some have attributed the inflation to excess demand, most notably Larry Summers, who had warned that the pandemic relief spending was too great. As evidence, one could point to the quick recovery of GDP and to reportedly tight labor markets. Others have variously blamed supply chain disruptions, shortages of certain inputs, OPEC's oil price increases, labor market disruptions because of COVID, and rising profit margins obtained through exercise of pricing power. We conclude that there is little evidence that excess demand is the problem, although we agree that in the absence of the relief checks, recovery would have been sufficiently slow to minimize inflation pressure. We closely examine the main contributors to rising overall prices and conclude that tighter monetary policy would not be an effective way to reduce price pressures. We also cast doubt on the expectations theory of inflation control. We present evidence that suggests there is currently little danger that higher inflation will become entrenched. If anything, rate hikes now will make it harder for the economy to adjust to current realities. The potential for lots of pain with little gain is great. The best course of action is to tackle problems on the supply side.

Suggested Citation

  • Yeva Nersisyan & L. Randall Wray, 2022. "What's Causing Accelerating Inflation: Pandemic or Policy Response?," Economics Working Paper Archive wp_1003, Levy Economics Institute.
  • Handle: RePEc:lev:wrkpap:wp_1003
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    File URL: http://www.levyinstitute.org/pubs/wp_1003.pdf
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    References listed on IDEAS

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    1. Dimitri B. Papadimitriou & L. Randall Wray, 2021. "Still Flying Blind after All These Years: The Federal Reserve's Continuing Experiments with Unobservables," Economics Public Policy Brief Archive ppb_156, Levy Economics Institute.
    2. Yeva Nersisyan & L. Randall Wray, 2020. "Are We All MMTers Now? Not so Fast," Economics One-Pager Archive op_63, Levy Economics Institute.
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    Cited by:

    1. Yeva Nersisyan & L. Randall Wray, 2022. "Is It Time for Rate Hikes? The Fed Cannot Engineer a Soft Landing but Risks Stagflation by Trying," Economics Public Policy Brief Archive ppb_157, Levy Economics Institute.
    2. Mark Setterfield, 2023. "Inflation and distribution during the post-COVID recovery: a Kaleckian approach," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 46(4), pages 587-611, October.
    3. James W. Douglas, 2023. "The Politics of Fiscal Responsibility: A Comparative Perspective By Thornton, Tonya E. and F. Stevens Redburn, Washington, DC: Westphalia Press. 2021. 166 pp. $22.50. ISBN‐13: 978‐1637238073," Public Budgeting & Finance, Wiley Blackwell, vol. 43(2), pages 82-86, July.

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    1. Yeva Nersisyan & L. Randall Wray, 2022. "Is It Time for Rate Hikes? The Fed Cannot Engineer a Soft Landing but Risks Stagflation by Trying," Economics Public Policy Brief Archive ppb_157, Levy Economics Institute.

    More about this item

    Keywords

    COVID-19; Inflation; Pandemic Relief; Pricing Power; Supply Chains;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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