Causes and lessons of accelerating global inflation

The world economy has recently experienced a strong inflationary shock, which the leading research institutions and central banks were unable to predict. In advanced economies inflation rates spiked up to levels had not been seen for decades. Inflation also hit emerging economies albeit the shocks of such magnitude are more common for the countries of this group. What was the reason of the inflationary wave of 2021-2002 and why was it unexpected? In the paper we propose that the main driver of inflation was the rapid recovery of aggregate demand while aggregate supply lagged behind since it was negatively affected by quarantine restrictions and supply chain disruptions. A sharp increase in the prices of food and energy contributed to inflation significantly. Unprecedented fiscal stimulus supported by liquidity injections from central banks was also an important factor in boosting demand and accelerating inflation. Sharp turn towards ultra­loose monetary and fiscal policy can be largely attributed to the experience of the previous decade which showed that inflation in advanced economies remained below the target level, despite constant stimulus. We discuss arguments considered by central banks when they kept monetary policy soft even after inflation significantly exceeded the target levels. Finally, we briefly discuss scenarios of possible future inflation, including a stagflation scenario, and analyze their underlying factors.