Post-pandemic Inflation: Interaction of Fiscal Stimulus, Supply-Chain Frictions and Expectations
The global inflation surge of 2021–22 was not the product of a single mechanical shock but of a confluence of empirically verifiable forces: unusually large fiscal transfers that temporarily boosted real disposable income, acute global supply-chain frictions that raised relative goods prices, and the heightened role of short- and medium-term inflation expectations in wage-setting. Cross-country, peer-reviewed evidence shows that countries with larger pandemic income support experienced systematically larger and more persistent increases in consumer prices and nominal wages, demonstrating a non-trivial Phillips-curve channel when demand shocks hit markets constrained by supply bottlenecks.
Supply-side disruptions amplified and temporally displaced demand pressures. Structural and empirical analyses indicate that shocks to global supply-chain pressures were a dominant proximate driver of the euro-area inflation peak in early 2022 and, more generally, accounted for a substantial fraction of inflation variance because the transmission through global input-output linkages magnified compositional shifts from services to goods consumption. These frictions generate a hump-shaped and persistent inflationary response: even after an initial logistical shock subsides, second-round effects (higher intermediate costs, repricing by firms, and distributional changes in consumption baskets) sustain elevated consumer prices.
Crucially, inflation expectations have had an enlarged influence on nominal wage dynamics in the post-pandemic period. Survey-based and micro-evidence indicate that (i) households and firms form expectations based in part on salient, frequently observed price changes, and (ii) the pass-through from expected inflation to negotiated wages intensified after the pandemic — such that even transitory realized inflation can translate into persistent upward pressure on labour costs if expectations become more sensitive to recent price experience. This mechanism helps explain why inflation that was initially supply-driven could feed back into domestic wage dynamics, increasing persistence and complicating disinflation without substantial real adjustment.
Policy implications drawn from peer-reviewed work are unambiguous but nuanced. First, macroeconomic stabilisation requires a two-front approach: where supply shocks dominate, monetary policy faces difficult trade-offs because raising rates is blunt against bottlenecks yet necessary if second-round effects threaten expectations and wage-price spirals. Second, preserving central-bank credibility and anchoring short- to medium-term inflation expectations materially reduces the wage pass-through and eases the real costs of returning inflation to target. Third, the evidence supports complementary non-monetary responses — targeted fiscal measures to alleviate supply constraints, and structural policies to increase supply-chain resilience — because conventional aggregate demand management alone is insufficient when global production networks transmit and amplify shocks.
In sum, the recent episode demonstrates that inflation persistence in an interconnected world depends on the interaction of fiscal impulses, global supply-chain structure, and expectation formation. Policymakers should therefore calibrate responses that jointly consider demand management, expectation-anchoring communication strategies, and direct measures to relieve supply bottlenecks rather than relying on any single instrument.
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