A worldwide increase in inflation began in mid-2021, with many countries seeing their highest inflation rates in decades. It has been attributed to various causes, including pandemic-related economic dislocation, supply chain problems, the fiscal and monetary stimuli provided in 2020 and 2021 by governments and central banks around the world in response to the pandemic, and price gouging. Recovery in demand through 2021 ultimately led to historic and broad supply shortages (including chip shortages and energy shortages) amid increasing consumer demand. Worldwide construction sectors were also hit.
In early 2022, the Russian invasion of Ukraine's effect on global oil prices, natural gas, fertilizer, and food prices further exacerbated the situation. Higher gasoline prices were a major contributor to inflation as oil producers saw record profits. Debate arose over whether inflationary pressures were transitory or persistent, and to what extent price gouging was a factor. All Central banks (except for the Bank of Japan which has kept its interest rates steady at –0.1%) responded by aggressively increasing interest rates. The inflation rate in the United States and the eurozone began slowing in the second half of 2022, continuing into 2023.
Background and causes
Consumer spending on goods moved in tandem with spending on services (see goods and services) prior to the COVID-19 recession, but upon emerging from the recession consumers shifted spending towards goods and away from services, particularly in the United States. This shift placed stress on supply chains, such that the supply of goods could not meet demand, resulting in price increases. In November 2021 inflation in the United States was 14.9% for durable goods, compared to 10.7% for consumable goods and 3.8% for services. Similar situations occurred in several other major economies. Supply chain stresses increased prices for commodities and transportation, which are cost inputs for finished goods.
In countries where food constituted a large part of the inflation increase, rising prices forced low-income consumers to reduce spending on other goods, thereby slowing economic growth. "In those countries with high inflation, consumer spending has weakened because household spending power has taken a hit from rising prices," said William Jackson of Capital Economics, "And you've generally seen much more aggressive moves to tighten monetary policy."
In June 2022, The Atlantic published an editorial article critical towards the U.S. Department of the Treasury controlling inflation. In 2021, Janet Yellen called the risk of inflation "small" and "manageable", and equally Federal Reserve Chairman Jerome Powell thought inflation would be "transitory", even as inflation rose above 6 percent. In 2023, the International Monetary Fund ascertained that "food and energy are the main drivers of this inflation", as rising prices continue to squeeze living standards not only in North America but worldwide.
Fiscal and monetary policy
Among the factors contributing to the surge of inflation were the unprecedented levels of fiscal and monetary stimulus enacted to sustain household incomes and the liquidity of financial institutions in the 2020-2021 period. Many governments around the world adopted such stimulatory actions early in the COVID-19 pandemic.
Some immediate actions were taken by banking systems across the country to combat the inflation surge, as most banks today target the rate of inflation in a country as their primary way of measuring economic flow for monetary policy. When inflation is present banks will make changes to their monetary policy by increasing interest rates or making changes to other policies. Higher interest rates make borrowing more expensive, reducing consumption. This is put into place purposely to maintain a level of consumption that will contribute to a steady level of inflation or decrease it, this is also known as inflation targeting.
U.S. President Joe Biden said in August 2023 that his Inflation Reduction Act was inaptly named because it had "less to do with reducing inflation than it has to do with providing alternatives that generate economic growth,". The Congressional Budget Office had projected the law would have negligible effect on inflation, and it did not appear to reduce inflation at all. Contrary to Republican predictions, it also did not appear to have increased inflation.