When people have more money, they tend to spend it–which leads to more demand for products and services. This can reverberate throughout an economy, increasing costs and prices for a broad array of goods and services, known as demand-pull inflation. This type of inflation can be a welcome boost to the economy, but it can also reduce the purchasing power of consumers, leading to higher consumer debt and less consumption overall.
In the aftermath of the COVID-19 pandemic, many countries experienced a surge in global price levels. This surge has been attributed to many factors, including the disruption of global supply chains by the virus and the various economic stimulus packages that were implemented in 2020 and 2021. Many economists predicted that this surge would be temporary, with prices decreasing once supplies rebounded and consumers regained confidence in the availability of important goods.
But others argued that the global demand surge was the driving force behind price increases. They noted that the large fiscal packages in the United States and elsewhere increased disposable incomes for consumers, giving them more spending power and contributing to inflationary pressures. This was a form of indirect supply-side inflation, as the increase in spending led to increased demand for commodities and other goods that are already in short supply.
Our RCTs confirm that direct supply-side or indirect demand-side inflation played an important role in the global run-up of prices during and after the pandemic. However, our decomposition of year-over-year price changes shows that the inflation driven by global supply shortages and the increase in commodity prices tended to be more persistent than the demand-driven component of the surge.
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