Inflation rose sharply after the COVID-19 pandemic. However, a new Brookings study points to an important cause. Strong consumer demand played a larger role than supply problems in driving prices higher.
Domenico Giannone and Giorgio Primiceri examined inflation in the United States and the euro area. Their research studies price changes during and after the pandemic. Specifically, they use economic models to identify the main causes of inflation.
Inflation After COVID-19
Inflation remained low during most of 2020. The pandemic reduced both economic activity and consumer demand. However, this situation changed as economies began to reopen.
U.S. inflation started to rise during the first half of 2021. It reached its highest point during the second quarter of 2022. Meanwhile, inflation in the euro area followed a similar path. Its peak came about six months later.
These similar trends suggest that common factors affected both economies. Therefore, the authors focus on the role of strong demand after the pandemic.
Why Demand Became Stronger
The study identifies three main reasons for stronger demand. First, consumers increased their spending after restrictions ended. This created a rapid recovery in demand for goods and services.
Second, governments increased spending during the recovery. Much of this spending was financed through higher budget deficits. Furthermore, this support helped maintain economic activity after the pandemic.
Third, central banks kept interest rates low for an extended period. As a result, borrowing remained relatively affordable for households and businesses. This policy also supported spending and economic recovery.
Together, these factors created stronger demand than many economists expected. However, forecasters and policymakers underestimated how strong the recovery would become. They also underestimated how long inflation would remain high.
The Role of Supply Problems
Supply problems also affected inflation during the pandemic. For example, global supply chains faced serious disruptions. Energy markets also experienced major changes.
However, the authors argue that these problems were not the main cause of rising prices. Strong demand played a larger role in both the United States and Europe. Therefore, the study challenges the idea that supply disruptions alone explain post-pandemic inflation.
At the same time, supply shocks still mattered. Monetary policy helped reduce their negative effects on economic activity. However, this support also contributed to higher inflation.
The Challenge for Central Banks
The study also raises questions about decisions made by central banks. During the pandemic, policymakers had incomplete information about economic conditions. Specifically, early economic data suggested that the recovery was weaker than it actually was.
Later data showed that economic activity had been stronger than first reported. Therefore, policymakers may have kept supportive policies because they believed the economy needed more help.
Furthermore, the authors highlight the importance of central bank credibility. Central banks need credibility when they decide how to respond to temporary supply shocks.
If central banks ignore these shocks for too long, inflation may become more persistent. As a result, temporary price increases can become harder to control.
Lessons From the Pandemic
The study offers an important lesson about inflation management. Policymakers must consider both supply and demand when prices begin to rise. However, they also need accurate information about economic conditions.
The authors do not argue that supporting the economy during the pandemic was necessarily wrong. In some cases, accepting higher inflation could have helped protect economic activity. Therefore, the right response may depend on the conditions facing each economy.
Overall, the research shows that post-pandemic inflation had several causes. Nevertheless, unexpectedly strong demand was the main factor identified by the authors. Furthermore, the experience highlights the importance of careful monetary policy and reliable economic data.
The findings may also help policymakers prepare for future economic shocks. Specifically, central banks must balance economic support with price stability. As a result, their credibility and ability to respond quickly remain important for managing inflation.
Reference
Giannone, D., & Primiceri, G. E. (2026, September 23). Demand-driven inflation. Brookings Institution. https://www.brookings.edu/articles/demand-driven-inflation/