Fiscal policy and the pandemic-era surge in US inflation: Lessons for the future

In the United States, massive fiscal expansion during the pandemic protected households and helped to return output and unemployment nearly to pre-pandemic expectations by the end of 2021--a sharp contrast with the slow recovery from the previous US recession. The authors document that many policymakers and analysts expected the fiscal-induced increase in demand for goods and services to be accommodated by an increase in supply without much change in inflation. However, those expectations proved incorrect, as fiscal stimulus pushed demand beyond the productive capacity of the economy, stoking temporarily high inflation. The authors present a collection of evidence implying that the inflation surge was driven largely by supply being fairly inelastic at the level of utilization to which the demand boom pushed the economy, with adverse supply shocks beyond the initial impact of COVID-19 playing a smaller role. The paper concludes with lessons for future fiscal stabilization policy.