Inflation occurs when prices rise faster than wages, causing the purchasing power of money to erode. Inflation can be good or bad for a country, depending on the direction of price movements and the magnitude of increases in production costs.
The COVID-19 pandemic caused severe disruptions to the global supply chain, creating shortages of essential goods and driving prices up globally. The fiscal packages and monetary stimulus that governments and central banks enacted to mitigate the economic impact of the pandemic also temporarily increased consumer demand, increasing prices.
Some economists believe that these supply and demand shocks largely drove the global inflation surge that occurred in 2021 and 2022. They argue that as demand rose, companies faced higher production costs and opted to pass these rising prices on to consumers through increased inflation rates. This allowed them to reap the benefits of higher sales without sacrificing their profit margins. Other economists, however, argue that companies may not pass on all cost increases to consumers. They might choose to absorb the higher production costs instead, or risk losing customers to foreign competition that is unaffected by the production cost increases.
Using data from the OECD, we can dissect the contribution of different factors to the inflation acceleration that occurred during and after the pandemic lockdown. This allows us to determine whether the inflation surge was primarily driven by demand or supply factors, and whether these trends were temporary or permanent.