Decoding the Factors Behind US Inflation During the Pandemic Era.

The increase in US inflation during and after the COVID-19 pandemic was primarily driven by developments that directly raised prices rather than wages, including sharp increases in global commodity prices and sectoral price spikes driven by 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. Tight labor markets are beginning to play a more significant role in pushing up prices, even as the effects of commodity and sectoral price shocks wane. Bringing inflation down to the Fed’s 2% target will require bringing the demand and supply of labor into better balance.