Inflation since the Pandemic: Lessons and Challenges

This paper reviews the drivers of the post-pandemic U.S. inflation surge and subsequent decline, including the behavior and role of inflation expectations. The sharp rise in inflation reflected severe imbalances between supply and demand stemming from the shocks of the pandemic and the policy response. Measures of short-term inflation expectations increased alongside realized inflation, especially those of households and firms, which may have contributed to inflation’s persistence through price- and wage-setting behavior. However, measures of longer-term inflation expectations remained generally well anchored, which likely prevented a larger or more lasting increase in inflation. The stability of longer-term inflation expectations, together with easing supply and demand imbalances, allowed inflation to fall from its peak in mid-2022 without a large increase in unemployment. We conclude by reviewing some lessons learned from this episode as well as potential risks to inflation going forward.