What's the deal with inflation?
By Cody AndrusThe recent surge in inflation has been driven by a combination of factors that disrupted the global economy over the past few years. One of the main causes was the COVID-19 pandemic, which forced widespread lockdowns, reducing production and creating supply chain bottlenecks. As economies reopened, demand for goods surged, but supply couldn’t keep up, leading to price hikes across numerous sectors. For example, semiconductor shortages impacted industries from electronics to automobiles, pushing up prices on many consumer products.
Another major contributor was increased government spending in response to the pandemic. To stimulate economic recovery, many governments, including the U.S., provided substantial financial aid to households and businesses. While this aid helped people in the short term, the influx of cash contributed to higher demand. When combined with supply constraints, this demand surge further fueled inflation.
Energy prices also played a critical role. The Russian invasion of Ukraine severely disrupted global energy supplies, particularly in Europe, as many countries depend on Russian oil and gas. Sanctions on Russia, along with its retaliatory actions, created significant shortages, especially in natural gas. This shortage increased energy costs worldwide, leading to higher prices for goods and services that rely on energy for production or transportation. Consequently, the cost of living spiked for consumers.
Labor market challenges added another layer to inflationary pressures. The pandemic caused a re-evaluation of work-life balance for many, leading to labor shortages in some industries as workers demanded better wages or shifted careers. Businesses, facing these increased labor costs, often passed them on to consumers in the form of higher prices, further fueling inflation.
Monetary policy also played a role. Central banks like the Federal Reserve in the U.S. had kept interest rates low for an extended period to encourage borrowing and spending, stimulating the economy. But these low rates can also contribute to inflation, as they make borrowing cheap, which increases spending. In response to rising inflation, many central banks have begun raising interest rates to try to control price growth, though this approach takes time to show effects.
AP, Reuters, Bloomberg, The Economist, Brookings Institution, Council on Foreign Relations, Financial Times, World Bank.
