Inflation During the Pandemic: What Happened? What is Next?

Abstract

We analyze the evolution and drivers of inflation during the pandemic and the likely trajectory of inflation in the near-term using an event study of inflation around global recessions and a factor-augmented vector auto-regression (FAVAR) model. We report three main results. First, the decline in global inflation during the 2020 global recession was the most muted and shortest-lived of any of the five global recessions over the past 50 years and the increase in inflation since May 2020 has been the fastest. Second, the decline in global inflation from January-May 2020 was four-fifths driven by the collapse in global demand and another one-fifth driven by plunging oil prices, with some offsetting inflationary pressures from supply disruptions. The subsequent surge in inflation has been mostly driven by a sharp increase in global demand. Third, both model-based forecasts and current inflation expectations point to an increase in inflation for 2021 of just over 1 percentage point. For virtually all advanced economies and onehalf of inflation-targeting emerging market and developing economies (EMDEs), an increase of this magnitude would leave inflation within target ranges. If the increase is temporary and inflation expectations remain well-anchored, it may not warrant a monetary policy response. If, however, inflation expectations risk becoming unanchored, EMDE central banks may be compelled to tighten monetary policy before the recovery is fully entrenched.

Demand and Supply Shocks: Evidence from Corporate Earning Calls

“…In the case of inflation, the historical decomposition shows that demand and supply shocks countered each other during COVID-19 dampening the decline in inflation, similar to the finding by Ha et al (2021). The relatively larger role of demand also occurs in the case of inflation and, as a consequence, annual inflation fell from 2 percent on an annual basis in the first quarter of 2020 to 0.7 percent in the second quarter and rebounded quickly.…”

Potential Risks of Implementing Quantitative Easing Monetary Policy

“…The outbreak of a large-scale pandemic causes oil prices to plummet as the embargo disrupts transport and travel, which account for two-thirds of global energy consumption [7]. For oil-exporting countries, a significant drop in the price of oil can have a severe impact on the volume of their exports and fiscal revenues, and governments may reduce government spending as a result.…”

“…As mass pandemic outbreaks and embargoes have led to a surge in unemployment, at least 40 countries have adopted the policy of 'temporary wage subsidies' as a means of mitigating the effects of the economic crisis. Blanchard notes that rising inflation and tight labour markets may prompt workers to demand nominal wage increases to catch up with or even exceed inflation, creating a wage-price spiral [7].…”

The effect of the global supply chain and oil prices on the inflation rates in advanced economies and emerging markets

“…They detect that Global Value Chain (GVC) has a significant effect on transmitting supply chain disruptions from most countries that have been unprecedented. Ha et al (2021) investigated consumer price change forces, focusing on the COVID‐19 pandemic in developed and developing countries. Their results reported that supply chain disruptions are the most considerable force in increasing the current inflation.…”