Although inflation has risen sharply for multiple reasons, increased demand is by far the most important factor. The common argument about strangled ports, microchip shortages, and other supply-side issues simply cannot explain why advanced economies grew so briskly in 2021.
CAMBRIDGE – Commentators have generally offered two arguments about advanced economies’ performance since COVID-19 struck, only one of which can be true. The first is that the economic rebound has been surprisingly rapid, outpacing what forecasters expected and setting this recovery apart from the aftermath of previous recessions.
The second argument is that inflation has reached its recent heights because of unexpected supply-side developments, including supply-chain issues like semiconductor shortages, an unexpectedly persistent shift from services to goods consumption, a lag in people’s return to the workforce, and the persistence of the virus.
The first argument is more likely to be true than the second. Strong real (inflation-adjusted) GDP growth suggests that economic activity has not been significantly hampered by supply issues, and that the recent inflation is mostly driven by demand. Moreover, there is reason to expect demand to remain very strong, which means that inflation will persist.
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CAMBRIDGE – Commentators have generally offered two arguments about advanced economies’ performance since COVID-19 struck, only one of which can be true. The first is that the economic rebound has been surprisingly rapid, outpacing what forecasters expected and setting this recovery apart from the aftermath of previous recessions.
The second argument is that inflation has reached its recent heights because of unexpected supply-side developments, including supply-chain issues like semiconductor shortages, an unexpectedly persistent shift from services to goods consumption, a lag in people’s return to the workforce, and the persistence of the virus.
The first argument is more likely to be true than the second. Strong real (inflation-adjusted) GDP growth suggests that economic activity has not been significantly hampered by supply issues, and that the recent inflation is mostly driven by demand. Moreover, there is reason to expect demand to remain very strong, which means that inflation will persist.
To continue reading, register now.
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