An Assessment of Pandemic Era Inflation, 2021–2022

This paper examines the inflationary period of 2021 to the middle of 2022 primarily by employing US data but is suggestive of the global inflation experience given important cross-border linkages. Inflation is posited as a result of buyer firms, operating across multiple, global supply chain stages, who must shift their purchases to a reduced set of supplier companies. Supply is crimped because of pandemic impacts on capacity. Supply-induced shortages cause global demands to concentrate around fewer oligopoly producers who hike markups and prices. Empirical work is directed at understanding which specific factors that affect pricing are most responsible for the experienced inflation. The paper finds that markup increases represent a larger fraction of price increases than the other price components, suggesting that profit-push is the most important cause of the global inflation experience. Industrial data show that cuts to the aggregate productive capacity of firms did occur, setting the stage for shortages to develop, particularly after demand recovered from the pandemic lockdown.