America's recent inflation caused by rising energy prices and backlogs from COVID-19

Inflation has been a major theme of the 2024 president election campaign.

What caused inflation in America to spike in 2021 and 2022?

Ben S. Bernanke?and?Olivier Blanchard attempt to answer this question in their June 2023 Brookings article.[1] Their findings are worth detailing, as they point to rising commodity prices and sectoral price spikes, rather than fiscal policy, that is, the Government’s stimulus packages, as the underlying cause of the high inflation experienced in 2021-22.? They conclude,

“The large fiscal packages in the U.S. would appear primarily in the labor market, as increased demand for workers put upward pressure on wages and, ultimately, prices. In fact, most of the rise in inflation in 2021 and 2022 was driven by developments that directly raised prices rather than wages, including sharp increases in global commodity prices and sectoral price spikes driven by a combination of pandemic-induced kinks in supply chains and a huge shift in demand during the pandemic to goods from services. Fiscal policy contributed to the inflation, but primarily through its effects on consumer demand for commodities and goods in limited supply rather than through the labor market.”

Richard Hernandez argued that three main components explain the rise in inflation since 2020: volatility of energy prices, backlogs of work orders for goods and service caused by supply chain issues due to COVID-19, and price changes in the auto-related industries.

The rapidity with which the spikes caused by COVID-19 imbalances worked themselves out of the economy is shown in the accompanying chart.

Inflation, once a mountain, appears now to be a molehill.

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[1] Ben S. Bernanke and Olivier Blanchard (June 13, 2023). What caused the U.S. pandemic-era inflation? https://www.brookings.edu/articles/what-caused-the-u-s-pandemic-era-inflation/

[2] Richard Hernandez (January 2023). What caused inflation to spike after 2020? U.S. Bureau of Labor Statistics Monthly Review. https://www.bls.gov/opub/mlr/2023/beyond-bls/what-caused-inflation-to-spike-after-2020.htm