0% found this document useful (0 votes)

52 views

The Causes of and Responses To Today's Inflation: Joseph E. Stiglitz and Ira Regmi

Uploaded by

Guadalupe Arcos

We take content rights seriously. If you suspect this is your content, claim it here.

Available Formats

Download as PDF, TXT or read online on Scribd

0% found this document useful (0 votes)

52 views

The Causes of and Responses To Today's Inflation: Joseph E. Stiglitz and Ira Regmi

Uploaded by

Guadalupe Arcos

We take content rights seriously. If you suspect this is your content, claim it here.

Available Formats

Download as PDF, TXT or read online on Scribd

You are on page 1/ 50

Industrial and Corporate Change, 2023, 00, 1–50

DOI: https://doi.org/10.1093/icc/dtad009

Downloaded from https://academic.oup.com/icc/advance-article/doi/10.1093/icc/dtad009/7071722 by National Science & Technology Library user on 09 March 2023
Article

The causes of and responses to

today’s inflation
Joseph E. Stiglitz1,* and Ira Regmi2
1
543 Kravis Hall, Columbia University, 665 West 130th Street, New York, NY 10027, USA. email:
[email protected] and 2 Macroeconomic Analysis, Roosevelt Institute, 570 Lexington Avenue, 5th Floor,
New York, NY 10022, USA. email: [email protected]
*Main author for correspondence.

Abstract
Over the last couple years, the world has experienced the highest levels of inflation in more than four decades.
This paper provides a framework for analyzing the causes and the appropriate responses. We show that it
is not caused by an excess of aggregate demand, and in particular, not caused by any excess consumption
arising from excessive pandemic spending, but by supply-side shocks, largely induced by the pandemic (e.g.,
chips), and also by the war in Ukraine, combined with sectoral demand shifts. We analyze the role played
by market power and the lack of resilience. Increases in interest rates, beyond normalizing levels, will do
little to address the underlying problems and may exacerbate them, impeding effective responses to supply
shortages. The paper describes alternative fiscal and other measures that, while addressing current inflation,
have further long-term welfare benefits.
JEL classification: E00, E31, E52, E58, E63

1. Introduction
US (monthly) inflation rates started to increase dramatically in early 2021, peaking in June 2022
at an annual rate of slightly above 9% before starting to decline (Figure 1). Core inflation rates
(excluding the volatile energy and food sectors) followed a similar pattern (Figure 1). While
inflation rates were still below the rates in the late 1980s—when they hit 14% and above—
anxieties quickly arose that we might be entering a new inflationary period.
Some blamed that fiscal policy—excessive spending during the pandemic, especially in the
United States—is not as well targeted for the initial inflationary impulse.
People accused the Federal Reserve of getting behind the curve. They believed the Fed should
have raised interest rates earlier, recognizing the excesses of aggregate demand. Now, some
alleged, it would take higher interest rates, maintained for longer and with a deeper downturn,
to tame inflation. Others argued that the inflation was transitory, driven by pandemic supply
interruptions.
Interpreting the cause of current inflation—and therefore how best to manage it—is not simple.
We have never had an event like the pandemic shutdowns, with a war in Ukraine interrupt-
ing food and energy supplies even before the global economy had recovered from coronavirus
disease 19 (COVID-19). Some suggested that the underlying cause of the inflation was excess
pandemic spending—well intended, to prevent a pandemic depression and protect the vulner-
able, but still excessive and not well targeted. Even without such fiscal support, there might
have been demand-side inflationary pressures once local pandemic restrictions were relaxed, with
individuals spending money not spent while supply remained constrained.

© The Author(s) 2023. Published by Oxford University Press in association with Oxford University Press and the
Industrial and Corporate Change Association. All rights reserved. For permissions, please e-mail:
[email protected]
2 J.E. Stiglitz and I. Regmi

If demand were the cause, the argument went, curbing demand was the answer; and that is
what conventional monetary policy is good at, though with long and variable lags. But if, as
we believe, inflation was more microeconomic in its origins—a combination of specific supply
shortages, demand shifts, and firms with market power taking advantage of the market turbu-
lence to raise prices even further—then raising interest rates might not solve the problem of
inflation and also might exacerbate inflation even while inducing an economic downturn. The
answer to the rhetorical question “Will raising interest rates increase the supply of food or oil?” is
obvious.
In an almost tautological sense, inflation reflects an imbalance in supply and demand, so both
demand and supply are involved (at least in competitive markets—but because many markets
in the United States are far from competitive, one needs to go beyond such a simple analysis to
understand inflation in markets with market power, as we do below); one could reduce inflation
either by reducing demand or increasing supply. But as the previous paragraph suggests, there is
something deeper about the current debate: is today’s inflation the result of an excess of aggregate
demand, or is it the result of a myriad of sectoral supply-side shocks? The optimal response to
today’s inflation depends on the answer to that question.
Of course, both may be true, at least to some extent. But this paper addresses the question of
what the predominant source of today’s inflation is and provides a clear answer. It is not aggregate
demand but a host of microeconomic problems on the supply side (including increased exercise
of market power) combined with shifts in the patterns of demand.

1.1. Theories of inflation and disentangling demand and supply

The simplest macroeconomic models relate price inflation simply to the disparity between aggre-
gate demand and the economy’s “potential” output (economies can actually produce beyond
potential output for a period of time, by forgoing needed maintenance, e.g.). At the same time,
wage inflation is driven by the level of unemployment, with low levels of unemployment giving
rise to increasing wage inflation. The intuition behind these dynamics is simple: in competitive
markets, prices (wages) go up if and only if there is an excess of demand for goods (labor) over
supply.
But obviously, the goods and labor market are interrelated, and competition is far from perfect,
so more general formulations have price inflation affected by wage inflation and vice versa. Hence,
it is conceivable that high demand has its effects indirectly first through tightness in the labor
market, which then gets passed onto prices. In the same way, price inflation gets passed on into
wages, and this then sets off the much-feared wage–price spiral.
Section 2 shows that there has not been an excess of aggregate demand—that cannot be the
source of inflation. Sections 2 and 3 argue that excess aggregate demand has, moreover, not
The causes of and responses to today’s inflation 3

manifested itself in the current period of inflation indirectly through the labor market, in spite of

Downloaded from https://academic.oup.com/icc/advance-article/doi/10.1093/icc/dtad009/7071722 by National Science & Technology Library user on 09 March 2023
all the concerns about labor shortages. This is important because some economists have argued
that, regardless of the source of inflation, it has to be quickly tamed, lest a wage–price spiral be
set off.
But there are multiple reasons (some elaborated in the following) not to be too concerned
about a wage–price spiral. During the period in which inflation originally increased in the pan-
demic (February 2021–May 2021), wage increases remained muted. At least for this inflationary
episode, it appears that wages lagged behind prices. It was price inflation that gave rise to wage
inflation. So we must explain the origins of this price inflation, and Section 2 shows that it cannot
be attributed to an excess of aggregate demand.
There is further strong evidence that we are not facing a nascent wage–price spiral.
While inflation does vary considerably month to month, it is heartening that headline inflation
has slowed down over the last 4 months to below an annual rate of 3%, a slowing consistent
with the supply-side interpretation developed in Section 3, but inconsistent with the standard
macroeconomic demand-side analysis. (Of course, taming inflation does not mean that infla-
tion rates will immediately fall to the old target of 2%, a target that was essentially pulled
out of thin air. And, of course, it does not mean that prices will return to their pre-pandemic
levels).
There are still other indications. Nominal wage growth has already come down markedly. The
New York Federal Reserve’s Underlying Inflation Gauge (UIG) “captures sustained movements
in inflation from information contained in a broad set of price, real activity, and financial data,”
peaked in June 2022 at 4.8% and by October was down to 4.2% (Federal Reserve Bank of New
York, 2022).1
Some, looking at the tightness of the labor market, suggest that there should be wage inflation;
but in recent years, with a similar degree of tightness, when we account for price inflation, we
have not seen significant wage inflation. Of course, there are many reasons why there may not
be a stable relationship between the output gap and goods inflation or unemployment and wage
inflation, discussed further in Section 4. The latter might be affected by changes in demography,
search costs, or turnover costs—variables that normally change slowly. A shock to the economic
system, such as that associated with the pandemic, has a multitude of effects on individual sectors
and on the aggregate. When the sectoral disturbances are large enough, one cannot rely on previ-
ously estimated macroeconomic relationships, at least for the periods until normalcy is restored.
The central contention of this paper is that to understand today’s inflation, one has to look at
sectoral problems, not at the aggregate. The rise in inflation originates in these shortages, and
inflation will be tamed when these shortages are resolved.
Much of the slowdown in inflation in late 2022 should not have come as a surprise. Pandemic-
induced supply bottlenecks seemed to be in the process of being resolved (see Section 3) as
inventories are restored to more normal levels2 and delivery lags are markedly reduced.3 There
were reasons to believe that prices of energy, food, and autos, for instance, would not continue to
rise but would actually decrease, setting off disinflationary processes. But even then, uncertainty
persisted: no one could predict when the war in Ukraine would end or how the pandemic in
China, with its citywide lockdowns, would evolve.
Still, it is clear that the disinflationary processes that will be set off as the supply shortages
get resolved will result in lower wage and price pressures at any given level of output gap or
unemployment.

1 It is interesting that the UIG’s perspective of moderating inflation is consistent with data concerning inflationary
expectations cited in Section 4 of this paper.
2 Increasing by nearly 17% by September 2022 from the trough in September 2021. The increase in car inventories
by almost 70% since its lowest point in February is indicative that the car shortage, which played such a large role in
inflation earlier in the pandemic recovery, is now being alleviated. It is reflected in a fall in the average transaction price
for cars (BEA 2022a).
3 The Supplier Deliveries Index, measuring whether deliveries are taking a longer or shorter time (put together by
the Institute for Supply Management), reports an almost 40% decline between October 2022 and a year earlier, with
delivery times now getting shorter rather than longer (Institute for Supply Management, 2022).
4 J.E. Stiglitz and I. Regmi

There is one more important set of inflation theories that has received attention in recent years,

Downloaded from https://academic.oup.com/icc/advance-article/doi/10.1093/icc/dtad009/7071722 by National Science & Technology Library user on 09 March 2023
focusing on how expectations of inflation in the future may drive inflation today. These forward-
looking inflation models have been important for people who worry about inflation momentum:
once inflation starts, the belief that it will continue sustains it. Without addressing them, under-
lying theoretical models and the assumptions that go into them, inflationary expectations have
been very muted and are clearly not driving today’s inflation (see footnote 67).

1.2. Designing a policy response

We argue that supply-side and demand-shift inflation is markedly different from inflation arising
from an excess of aggregate demand. Given the evidence that today’s inflation is overwhelmingly
related to sectoral disturbances, we are not optimistic that a blunt instrument such as raising
interest rates will do much to tame inflation unless it causes a marked slowdown in the economy.
The reduction in aggregate demand required to alleviate critical supply shortages is large, assum-
ing that the shortages will not be addressed by the market itself. Indeed, monetary tightening
may well be counterproductive and, in any case, is unlikely to be timely, even as it imposes large,
long-lasting, and inequitable costs. It is far better to address sectoral supply bottlenecks directly
rather than an across-the-board dampening of the economy with the concomitant increase in
unemployment. Section 7 shows some things we could do to temper inflation, including imple-
menting fiscal and other policies that would benefit society regardless of the pace of inflation.
Monetary policy, on the other hand, has the potential to inflict long-lasting scars.

1.3. The organization of the paper

This paper is organized into seven sections (Sections 2–8) beyond this introduction and a set
of concluding remarks. Section 2 looks at aggregate data to see whether there has in fact been
excessive aggregate demand. Section 3 looks at the underlying microeconomics of the economy,
supply interruptions, demand shifts, and the increased exercise of market power. Section 4 takes
a closer look at the labor market, showing that nominal wage growth has already been tempered
and that there is little evidence of a wage–price spiral. Section 5 shows that US inflation, com-
pared to other countries, is not particularly high, which one would have expected had excessive
pandemic spending caused current inflation. Section 6 provides a few remarks about parsing the
relative importance of alternative sources of inflation. Section 7 examines some of the risks posed
by excessive increases in interest rates. Section 8 discusses some of the fiscal and other measures
that might be more effective in addressing inflation than monetary policy. Finally, the concluding
section argues that an appropriate assessment of today’s macroeconomic situation, with all the
risks and uncertainties including those associated with aggressive monetary tightening, suggests
a more measured response from now on. While restoring interest rates to more normal levels has
distinct advantages, going beyond that—raising them too far and too quickly—is problematic,
especially given the buildup of debt in the era of near-zero interest rates.

2. Excess aggregate demand is not the primary source of inflation

People who believe federal spending during the pandemic (particularly through the American
Rescue Plan, as well the The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is
the source of the post-reopening inflation typically focus on the resulting excessive consumption
by the recipients. However, real personal consumption, even after recovering from the depths of
the pandemic, was only slightly above trend and not commensurate with the level of inflation
seen during the same time.
Demand-driven inflation, of course, is the result of an excess of total demand over potential
supply. Aggregate demand consists of consumption, government expenditures, investment, and
net exports. In the following, we look at what has happened to each. As we shall see, neither
the timing nor the pattern of inflation across sectors is well explained simply by an excess of
aggregate demand; and indeed, for most of the time since the onset of the pandemic, aggregate
demand has remained below potential. When it has exceeded estimated potential, the excess is
insufficient to explain the observed increase in inflation.
The causes of and responses to today’s inflation 5

2.1. Real personal consumption is only slightly above trend

Several major spending bills were designed to stabilize demand throughout the economy during
the COVID-19 pandemic. The International Monetary Fund (IMF) estimated that the fiscal stim-
ulus related to the pandemic was 25.5% of the total US Gross Domestic Product (GDP) (IMF
Fiscal Affairs Department, 2021). The goal was to stabilize economic spending, and it was suc-
cessful. As Figure 2 shows, we have seen a rapid recovery in real personal consumption in the
aftermath of the pandemic.4
Comparing the core Consumer Price Index (CPI) (i.e., excluding the volatile energy and food
components) to personal consumption expenditure, we see that inflation started to increase in
early 2021 and rose until early 2022, after which it began to stabilize with relatively moderate
fluctuations. The period of increase in inflation corresponded to a period in which consumption
was markedly below trend (though increasing rapidly).5
What matters for aggregate price pressure is total aggregate demand, and other components
of aggregate demand remain weak, as we shall see.6 But this simple comparison refutes the claim
that excessive consumption was the central cause of excessive inflation that followed the post-
pandemic recovery.
The speedy return to trend lines as the economy reopened in 2021 was an indication of a
successful recovery quite unlike the aftermath of the 2008 Great Recession, where demand never
really returned to trend, as seen in Figure 3.7
Nominal consumption is indeed higher than the previous trend line, and while some hold this
out as evidence of excessive demand, all this represents that prices are higher. (Moreover, those
higher prices also mean that nominal potential output is also proportionally higher.) The source
of those price increases needs to be investigated. Our analysis, detailed later, shows clearly that
the primary source of those price increases is not excess aggregate demand but a complex set of
supply and sectoral demand shocks.

2.2. Government expenditures

The American Rescue Plan and other COVID-19 measures provided help for state and local gov-
ernments and increased federal expenditures in certain areas. But again, government expenditures
are not contributing to excessive growth in aggregate demand that might underlie current

4 Because we are looking at a relatively short period, it makes little difference whether we use a log or real scale.
For convenience, we use the latter. Figure 2 (and most of the following figures) is based on the National Income and
Product Accounts (NIPA) that use chain-weighted indexes for adjusting for inflation.
5 Consumption was recorded above trend in June 2021 and has remained marginally above trend since then, while
the inflation rate had started to see sharp increases beginning in February/March 2021. The monthly inflation rate went
down slightly in July and August of 2021, as consumption reached above-trend levels.
6 When inflation picked up, aggregate demand was still substantially below potential. See the fuller discussion in
the following.
7 These results parallel those of Aladangady et al. (2022), obtained using the PCE deflator.
6 J.E. Stiglitz and I. Regmi

Figure 4. Real government expenditures are not significantly above trend

inflation. Real government expenditures—including federal, state, and local funds inclusive
of national defense and nondefense spending (excluding transfers)—have, with the exception of
one-quarter near the peak of the pandemic, been below trend, most recently during the period of
increased inflation and significantly so (see Figure 4).

2.3. Investment
Gross private domestic investment, while markedly below trend in the period during which infla-
tion took off, rose above trend from Q3 of 2021 until around Q2 of 2022, as seen in Figure 5. It
is important to note, however, that this period also coincides with a dramatic increase in inven-
tory accumulation as seen in Figure 6, some of which was “unintended,” simply the result of
consumption and other components of aggregate demand being less than firms had anticipated.
Focusing on investment in plants and equipment in Figure 7, we see that it remained below
trend.
On the other hand, as we can see in Figure 8, residential investment accelerated sharply to
extraordinarily high levels within a short period in the early pandemic. However, there have been
steady declines since April 2021, in the aftermath of the interest rate hikes.
The causes of and responses to today’s inflation 7

Figure 6. Inventory accumulation shot up in 2021

Figure 7. Investment in plants and equipment is below trend

8 J.E. Stiglitz and I. Regmi

Figure 9. Real net exports have plummeted

2.4. Net exports

The final component of aggregate demand is net exports. Net exports have actually headed the
wrong way: down. Their rapid decline since the pandemic, as shown in Figure 9 (with a slight
rebound in 2022), reinforces our conclusion that aggregate demand is not the source of inflation.

2.5. Aggregate demand

Figure 10 puts the pieces together, adding up C + I + G + NE (consumption plus investment plus
government expenditures plus net exports) and comparing them all with trend, to show that in
total, the economy has largely remained below trend. Actual output equals aggregate demand,
provided that supply is not the binding constraint.8 The accumulation of inventories as shown
earlier in Figure 6 suggests that aggregate supply was not a binding constraint. (As we discuss
more fully in the next section, there were, of course, important sectoral supply constraints.)
Comparing actual output with the Congressional Budget Office’s (CBO’s) calculation of poten-
tial GDP—its estimate of what the economy could produce—substantiates that excess aggregate

8 If there were aggregate supply constraints that were binding, observed output might be below trend; even if in
the absence of such supply constraints, demand would have exceeded trend.
The causes of and responses to today’s inflation 9

demand is not the source of today’s “excess” inflation (CBO 2022a). That is, we are only trying
to explain the increase in the post-pandemic inflation rate relative to the pre-pandemic inflation
rate.9 As Figure 11 shows, GDP remained below potential except for a brief period between Q4
of 2021 and Q1 of 2022.10,11
Indeed, if the relationship between the “aggregate output gap” and price inflation were stable,
then the period following the onset of the pandemic until at least mid-2021 should have been
marked by deflation or disinflation. In addition, if this relationship were near linear, the cumu-
lative effect would have resulted in prices lower now than even before the pandemic, which is
clearly not the case. We emphasize this point not to make any claims about what this relationship
is like but rather to reinforce the central theme of this paper: that one has to go beyond aggregates
and macroeconomics to understand what has occurred.12
Our argument can be seen another way, by comparing GDP projections before and after the
pandemic. Before the pandemic, the expectation was that prices would remain relatively stable—
that is, aggregate demand would increase in tandem with aggregate supply—so GDP projections

9 Pre-pandemic, we still had inflation, and we are not trying to explain the reasons underlying “normal” inflation.
Throughout the following discussion, we seek to understand just this excess inflation, even though, for simplicity, we
will often discuss alternative explanations of today’s inflation.
10 The data in Figure 11 from the CBO’s most recent report show little adjustment for the pandemic. Poten-
tial output is typically defined as the level of output and the associated level of unemployment above which inflation
starts increasing (increases to above the target level, currently 2%). It is largely determined by the economy’s capacity
to produce its labor force, capital stock, the terms of trade on imported intermediate goods, and productivity. The
pandemic-induced variations in all of these, beyond the large sectoral shocks (to be discussed at greater length in the
next section). In this appendix, we show the decrease in labor force and capital stock (relative to trend) induced by
the pandemic. In the years before the pandemic, the working-age population had largely stagnated; today, it is slightly
larger than it was before the pandemic. The capital stock is a mere 1.4% below trend (see Figure A1). While these
and other adjustments would lower potential GDP, they would not lower it enough to make aggregate demand lower
than potential output or at least lower it enough for excess aggregate demand to be the source of inflation. During the
pandemic, the observed decrease in the labor force participation rate was at least in part the result of the increased risk
of working; nonetheless, the number of individuals seeking employment who could not find jobs increased enormously.
In addition, because of COVID-19, there was a slight but significant increase in the number of days individuals were
absent from work because of illness. Even if these decreases were permanent (e.g., a result of attitudinal shift away
from work and a higher incidence of disease), the resulting impact on output would be insufficient to result in the
level of inflation we have witnessed. (The most recent evidence suggests that these changes are not permanent: current
participation rates are negligibly above levels seen in 2015. See also the discussion in Section 4.) While labor supply
and capital stock decreased from trend as a result of the pandemic, productivity increased dramatically—by some 4%
between the first and second quarters of 2020 alone (while the annual productivity increase has been well under 2%)
(BLS 2022i). Moreover, overall terms of trade were moving favorably toward the United States at a rate significantly
above trend (BEA 2022b). All these suggest that no matter how one looks at it from an aggregate perspective, excess
aggregate demand could not account for the magnitude of the “excess” inflation observed.
11 The CBO’s estimate for potential GDP changed considerably since the pandemic. We compare the actual GDP
to the CBO’s latest estimate of what potential output was in each of the earlier quarters.
12 See also the discussion on wage dynamics in Section 4.
10 J.E. Stiglitz and I. Regmi

Figure 12. Real GDP in 2021 was under CBO’s pre-pandemic projections

are, in effect, projections of aggregate demand. As seen in Figure 12, actual GDP with May 2022
as a baseline was more than 2% below the baseline projections of January 2020 (CBO 2020).
Still a third way to see that aggregate demand was not the driver of inflation is to look
at the unemployment rate. The unemployed are those people able and willing to work. When
there is significant unemployment, it means that there is unused worker potential (i.e., the econ-
omy is working below potential). This is typically refined to say that there is a “natural” rate
of unemployment, below which inflation exceeds some target level or above which inflation
starts to increase.13 Pre-pandemic, inflation was below the 2% target (only 1.8% in February
2020 according to the Personal Consumption Expenditure (PCE) index that the Federal Reserve
monitors) even though the unemployment rate was 3.5%. It was not until July 2022, well after
the inflation rate increased, that unemployment returned to that level. Even if one had said the

13 The original Phillips curve argued that there was a stable relationship between the unemployment rate and the
rate of inflation. The expectations-augmented Phillips curve gained prominence after Milton Friedman’s presidential
address to the American Economic Association in December 1967 (Friedman, 1968), in which he argued that there is
a stable relationship between the unemployment rate and the rate of increase in the inflation rate. The natural rate of
unemployment refers to the rate of unemployment at which inflation is at, say, 2 or 3%; the NAIRU refers to the critical
rate below which the inflation rate is ever increasing. Those who argue that the NAIRU has increased have to explain
why the inflation rate has not increased since the beginning of 2022. The case for a shift in the NAIRU is perhaps even
weaker than the case for a shift in the natural rate.
The causes of and responses to today’s inflation 11

Phillips curve had shifted so much that post-pandemic the natural rate of unemployment (or

Downloaded from https://academic.oup.com/icc/advance-article/doi/10.1093/icc/dtad009/7071722 by National Science & Technology Library user on 09 March 2023
the Non-accelerating inflation rate of unemployment (NAIRU)), the unemployment rate below
which inflation increases) was 5%, inflation would not have started increasing until July 2022.
Nonetheless, inflation started to increase in November 2020 when the unemployment rate was
6.7%, higher than almost anyone thinks the natural rate or NAIRU is. (Similar perspectives arise
from looking at wage inflation data, presented in Section 4).14 Something else was going on—
something that cannot be understood just by looking at aggregative statistics and invoking stable
and standard macroeconomic relations—the cross- and inter-sector shocks and constraints that
are the subject of Section 3.

2.6. Understanding why pandemic spending did not have the inflationary effect
expected by some
During the pandemic, there were large buildups of cash balances and wealth (savings above
normal level, called excess savings15 ), which some blamed on excessive government fiscal support.
But a careful analysis of the data by Aladangady et al. (2022) shows that fiscal support provided
little of the explanation; less consumer spending was the dominant explanation (see Figure 13a
and b).
In turn, the buildup of cash balances and excess savings gave rise to worries that it might set off
inflationary pressure as these were spent down. But the evidence presented earlier, particularly real
consumer expenditure, suggests that aggregate demand recovered but never became excessive.
Why?
There are three parts to the explanation, all supported by the data. First, as the pandemic
wound down and individuals found themselves with excess cash balances and greater savings
than they would otherwise have had, they did not spend the money quickly (Stiglitz and Baker,
2022a). And a considerable amount of the observed drop in household “excess savings” went to
pay “non-withheld” taxes (Arnon, 2022), such as capital gains (Baker, 2022c), which went up by
some 40% or more than $160 billion (Figure 14).
Interestingly, data from the Bureau of Labor Statistics (BLS)16 report the largest increase
in expenditures at the top—a group that received the least pandemic aid and, according to JP
Morgan Chase (Greig and Deadman, 2022), showed a slight increase in cash balances over the
period.
None of this should come as a surprise. Economic theory suggested that people would treat
excess savings as wealth and spend it gradually over their lives. It suggested, for instance, that
individuals would not go to restaurants that much more after the pandemic to compensate for
the lack of eating in restaurants during the pandemic. It also suggested that if high levels of
uncertainty persisted, individuals would want to keep higher levels of precautionary balances.17
(Personal savings rates by 2022 were above pre-pandemic trend levels until late 2021, well after
inflation started to increase. See Figure 15 from Aladangady et al. (2022))18

14 These results are generally unchanged if instead of focusing on the NAIRU we look at the overall relationship
between unemployment and inflation, or the Phillips curve, as discussed in footnote 15 and more extensively in Section 4
(and especially Appendix 4). Unemployment increased precipitously during the pandemic and has now returned to pre-
pandemic levels. If the Phillips curve were indeed stable, inflation would have fallen dramatically, and the average
inflation rate over the interval between the onset of the pandemic and now would have been markedly lower than pre-
pandemic. (If one were using an expectations-augmented Phillips curve, the rate of inflation would have been markedly
lower at the end of the period.) Of course, one can explain the seeming anomaly by saying that the Phillips curve
shifted—evidently by a large amount. But that argument carries with it a heavy burden to explain why it shifted so
much and why it would not shift back again as the economy gradually returns to normal. An ever-shifting Phillips curve
is of limited help for policy analyses, as we discuss further in Appendix 4.
15 Aladangady et al. (2022) define excess savings as savings above and beyond what people would have saved if
income and spending components had grown at recent, pre-pandemic trends.
16 BLS (2022a).
17 Stiglitz (2020) noted the possibility that the pandemic might generate inflationary pressures as a result of an
imbalance of aggregate demand and supply but emphasized the likelihood that there would be a need for enhanced
precautionary balances for an extended period of time.
18 Some pointed to the fall in the national savings rate as corroborating the “excessive” consumption perspective.
The best way to assess whether there was excessive consumption is to look at the levels of consumption, as we have
done. There are some statistical quirks in the measurement of the savings rate, which explain why it gives a misleading
picture. When these are corrected, the picture that emerges is that already presented. Because capital gains are excluded
from income in the national income accounts, this mechanically reduces the savings rate. The increased tax payments
12 J.E. Stiglitz and I. Regmi

Second, when individuals spent the money, they spent it heavily on globally produced goods,
reflected in the surge of imports in Figure 16.19 This did not have the multiplier effects or the
inflationary effects on the US economy that it would have had it been spent on domestically
produced goods.20
As seen in Figure 17, consumption expenditure on largely non-traded categories like recre-
ational and transportation services is comparable to or lower than pre-pandemic levels. Food
services and accommodations are only moderately higher. While there were increases in these

reduce disposable income, while the capital gains income, not accounted for as income in the national accounts, does
not show up as increased income. When adjusted for capital gains tax, the drop in savings is not as large as the official
measure. The adjusted savings rate was higher than pre-pandemic levels until Q4 of 2021 and fell only by 1% in Q3 of
2022.
19 The large movements cannot be explained just by the movements in exchange rates, which themselves exhibited
some complexity. They declined in the initial months of the pandemic but then recovered, reaching levels well in excess
of those pre-pandemic. There are too many forces at play to precisely determine the contribution of each; whatever the
cause, the fall in the exchange rate from early in the pandemic to early 2021 contributed to the inflation in that period,
while the increase in the exchange rate since mid-2021 until now has contributed to the inflation over that interval.
20 Obviously, US expenditures on traded goods are just a fraction of global expenditures, while by definition, US
expenditures on non-traded services represent the totality of those expenditures. Figure 16 shows imports increasing
from pre-pandemic levels by some 10%. If US purchases of global goods were roughly proportional to its share in
global income, this would have induced only a small percentage increase in global demand, well within the range that
global markets could have accommodated.
The causes of and responses to today’s inflation 13

Figure 15. Personal savings rate

categories in late 2020, the changes were merely a readjustment to pre-pandemic levels rather
than indicative of a sustained rise in demand.
And third, additional spending on domestically produced goods went disproportionately into
increased prices and profits rather than increased production, as we will see in later sections.
This also limited the multiplier effects of the spending, with the increased profits, share buy-
backs, dividends, and stock market values having a much more modest effect in stimulating
consumption or investment than if the spending had gone into increased employment and
wages.

2.7. Concluding comment

The evidence is overwhelming: Were there no supply problems, aggregate demand would not be
excessive. While the economy was able to recover from a devastating pandemic with the help
of an effective fiscal response, the inflation we have experienced is not best understood as an
excess of aggregate demand over aggregate potential supply. Rather, today’s inflation is the result
of a series of microeconomic, industry-specific problems, which we look at in detail in the next
section.
14 J.E. Stiglitz and I. Regmi

Figure 17. Consumption expenditures on some major product types

3. The supply side is the driver of inflation

To understand today’s global inflation, one must look at where the price increases are coming
from. Over the past 2 years, the sources of inflation changed, especially after Russia’s invasion of
Ukraine when energy and food prices moved to the center of the economic debate. The changing
sources and nature of inflation make the analysis complicated and the narrative complex. We
can identify five (often intermixed) major factors: energy and food; supply interruptions, most
notably for cars; demand shifts in the presence of supply inelasticities; increased rents (largely a
result of demand shifts in the location and type of housing desired); and manifestations of market
power (Figure 18).
COVID-19 was a major disturbance to both the demand and supply sides of the economy.
The policy focused largely on protecting individuals to ensure their standards of living did not
plummet; that approach meant there was always the risk that demand and supply would be out
of sync.21 But inflationary pressures did not become evident until well into the pandemic, indeed,
until in some respects we were in the process of recovery. And it started well before consumption
or aggregate demand had normalized. The global economy seemed unable to produce or at least
produce the goods and services that individuals wanted at that time.

21 Stiglitz (2020).
The causes of and responses to today’s inflation 15

Many thought that the supply-side problems and consequent inflation would be transitory.
The persistence of inflation was partly a result of two unanticipated shocks—the Russian invasion
of Ukraine, contributing significantly to food and energy inflation, and the omicron variant of
COVID-19, leading to further supply-side interruptions in global supply chains, especially with
China’s zero-COVID policy.
But there was another problem: an unexpected lack of resilience in the US and global
economies. Many market analysts were excessively optimistic as the US economy emerged from
the pandemic. They looked to the quick responses in some sectors, such as lumber (typically with
relatively short supply chains), not expecting the very slow responses elsewhere. Few anticipated,
for instance, the microchip shortage that led to soaring car prices—certainly not those who had
anticipated inflation coming from pandemic spending. In Appendix 2, we discuss some of the
reasons for this lack of resilience.
The lack of resilience meant that as the US economy responded and recovered from the
pandemic, a host of slow-to-correct supply shortages appeared, giving rise to the inflation we
experienced.22 While sufficient reduction in aggregate demand would alleviate the shortages, the
economic price of doing so would be enormous. A better strategy entails directly addressing the
microeconomic problems themselves, as we discuss later.
Even as this paper is being completed, the picture is changing. There are reports of reduced sup-
ply chain bottlenecks, with chip shortages ameliorating and shipping prices falling. Auto prices
are stabilizing as car inventories build up.23
In the following subsections, we discuss some of the main factors on the supply side giving
rise to inflation.

3.1. Energy and food price increases outside the domestic market are driving
much of current inflation
In the United States, 1.3 percentage points of the headline 7.7% 2022 CPI inflation as of October
2022, annualized, came from energy prices, and an additional 1.6 percentage points came from
food prices (BLS 2022b).24 By contrast, in the period from 2014 to the pandemic, energy had an
overall deflationary effect of about 0.15 percentage points.

22 Many of the shortages occurred outside the United States either because of COVID-19 lockdowns or limited
resilience abroad or arose because of shipping limitations discussed more fully below.
23 See footnote 4 above.
24 For an average US household, energy costs—fuel and service costs, heat, electricity, and gasoline—are the fourth
largest expense category, and energy prices are highly volatile. For an average US household, over 11% of an average
US household’s expenditures is spent on energy and 13% on food (Melodia and Karlsson, 2022; BLS 2022j). Because of
the importance of fertilizers, food and energy prices are related Hebebrand and Laborde (2022). Market power almost
surely plays a role here too. Food prices may also have been affected by large climate events.
16 J.E. Stiglitz and I. Regmi

As the global economy recovered from the depths of the pandemic, energy and food prices

Downloaded from https://academic.oup.com/icc/advance-article/doi/10.1093/icc/dtad009/7071722 by National Science & Technology Library user on 09 March 2023
rose. Energy prices were returning to more normal levels from very depressed levels following
the onset of the pandemic and did not reach pre-pandemic levels until early 2021. Then, in late
February 2022, in response to the Russian invasion of Ukraine, nations—including the United
States—responded with international sanctions on Russia. As a result, oil and food prices shot
up to heights that were almost twice those of pre-pandemic levels. But as the war has continued,
matters have normalized, and by the fall of 2022, oil prices were down by a third, returning to
levels around (or if adjusted for inflation, below) those seen in 2015 or at other pre-pandemic
peaks.25 But in economics, perceptions matter: consumers often seem more aware of and sensitive
to price increases than they are to decreases of the same magnitude.26
It is not likely that these particular sources of inflation will continue. Even if prices do not
come down, they will not go up, at least not at the rate they have since the war began. Of course,
were the war in Ukraine to end, energy and food prices would fall, which would be deflationary
or disinflationary. On the other hand, the Organization of the Petroleum Exporting Countries
(OPEC) might take actions to try to keep oil prices high (as it has already done), illustrating the
role that politics and market power play in the setting of global energy prices.27
Even if the war turns out to be protracted, there are reasons to believe that prices may go
down. As governments, households, and producers react and respond to this crisis, supplies
will increase and demand will be reduced. Already, energy prices have seen month-over-month
declines of 4.6% in July, 5% in August, and 2.1% in September 2022.28 Given the volatility of
energy prices, there is no assurance, of course, that this will continue. Indeed, there was a slight
reversal in October, with a 1.8% increase, and prices are still 17.6% higher than a year earlier.29
Food prices are also expected to moderate to 3%–4% in 2023.30
Looking a little further into the future, there is more cause for optimism. For half a century,
the US and European governments have paid their farmers not to produce. If the war continues,
presumably that policy could or should end—and again, as that happens, food prices would
fall.31 The price of fossil fuels should also decline markedly, with the decreased consumption
during the pandemic and war leading to prices below the pre-pandemic trend.32 Moreover, as
the world moves toward renewable energy, energy prices will largely be determined by the long-
run marginal (or average) cost of renewables, which is substantially below current prices (Sims
et al., 2021).
It would take a better crystal ball than we have to predict how fast all of these will hap-
pen. But the recognition that there are fundamental disinflationary forces at play should temper
inflationary expectations.

25 Some have suggested that food and energy prices have increased by more than can simply be accounted for by
the economic recovery, the war in Ukraine, and changes in the flows of oil and gas into the global market, indicating
that market power has been at play. With the OPEC deliberately taking actions to restrict production, that is obviously
the case. (Market power is discussed further.) This may also have to do with speculative and precautionary behavior,
with market participants building up stockpiles, against the contingency that prices might rise even further.
26 Thus, if oil prices go from $60 to $100 and then back to $60, people will remember inflation, not a temporary
price spike.
27 The OPEC had a production cut right before the US midterms, which as this paper goes to press, the OPEC is
poised to undo (Meredith and Turak, 2022). The OPEC of course denies that politics had anything to do with it.
28 These are seasonally adjusted changes from the preceding month in the CPI (energy) for all urban consumers.
29 12-month (unadjusted) increases peaked at 41.6% in June before falling to 32.9% in July, 23.8% in August,
and 19.8% in September.
30 Unlike energy, food prices did not plummet after the onset of the pandemic in 2020—they increased 3.4% in
2020, increased 3.9% in 2021, and are on track to increase from 9.5% to 10.5% in 2022 (US Department of Agriculture
(USDA), 2022).
31 Again, politics might interfere: farm lobby groups might lobby for the continuation of the restrictions. If that
were to happen, it would be a self-inflicted wound.
32 The reason for this is that the stock of oil will be greater than it otherwise would have been. The price of oil
(or any depletable) natural resource is a declining function of the stock and total demand. The stock of oil (and other
fossil fuels) post-war will be higher because the high prices deterred consumption from what it otherwise would have
been. The war itself has provided further impetus for countries to move toward renewables—beyond that provided by
the increasing evidence of the costs of climate change.
The causes of and responses to today’s inflation 17

3.2. Goods inflation is significant, historically unique, driven by supply-side

factors, and is already beginning to ease
Core goods, which exclude energy and food, are responsible for a significant share of recent
inflation. These goods contributed 2.3 percentage points to inflation in 2021 (almost all of
which—1.94 percentage points—was due to automobiles and car parts).33 By contrast, this cat-
egory had not contributed at all to inflation in the years leading up to the pandemic. Indeed, its
contribution was slightly negative.
In 2022, supply-side pressures began to ease. Core goods’ contribution to inflation remained
higher than pre-pandemic levels, but by October 2022 it had dropped to 1.8 percentage points.
A major explanation for these price increases is the idiosyncratic supply chain factors asso-
ciated with the disruptions prompted by the pandemic shutdowns and subsequent reopenings.
The Federal Reserve Bank of New York’s Global Supply Chain Pressure Index (GSCPI), which
integrates various indices that analyze delivery times, backlogs, and inventories to assess supply
chain pressures, shows that the sustained and frequent problems are much larger in magnitude
compared to historic trends (Federal Reserve Bank of New York, 2022). Supply chain pressures
have been easing consistently since April 2022, although they remain at historic highs (Stiglitz
and Baker, 2022b).
As supply chain pressures eased, the prices of nonfuel imports stopped advancing in April
2022 and have declined consistently since May 2022 (BLS, 2022c)34 (Figure 19).

3.2.1. Core inflation and the perpetuation of inflation

Some have cited price increases in core goods and services to argue against the supply-side hypoth-
esis: the inflation we are seeing is more than just energy and food. But this itself says nothing about
whether there is aggregate demand-driven inflation since increases in the price of noncore goods
seep into the price of core goods and services.
Inflation in intermediate goods used by the services sector will, for instance, increase the prices
of services. The same will happen for other goods. The key questions are as follows: Is an excess of
demand pushing inflation still higher? Is there a significant risk of triggering a wage–price spiral?
And, if so, is tightening monetary policy the best way to head off such a spiral? The first question
we have already answered in the negative. Later sections of this paper answer the second and third
questions. In Appendix 3, we take a closer look at three critical shortages and what lies behind
them: chips, energy, and shipping. We have also discussed the moderation of energy prices, down

33 From the beginning of 2022 until October, it contributed 0.3 percentage points to inflation. Source: BLS CPI;
authors’ calculations.
34 Nonfuel import prices are still markedly higher than they were a year earlier, but these steady monthly declines
temper inflation and should eventually become important sources of disinflation.
18 J.E. Stiglitz and I. Regmi

significantly from their peak with prospects of further decreases. Automobile companies report

Downloaded from https://academic.oup.com/icc/advance-article/doi/10.1093/icc/dtad009/7071722 by National Science & Technology Library user on 09 March 2023
that the chip shortages they faced earlier are being addressed, and chip makers more broadly
are discussing the possibility of a chip surplus.35 Cargo shipping rates have fallen by some 60%
since the peak in the summer of 2021—another indication that critical supply bottlenecks are,
at last, being addressed.36 Further, as we have noted, nonfuel import prices are falling sharply,
another major source of disinflation (in 2021 and earlier in 2022, they were adding to inflation.
See Figure 19).37

3.3. Large sectoral shifts in demand—partially induced by supply shortages—can

give rise to inflation
The simplistic debate about demand- and supply-side sources for today’s inflation misses one
crucial point: there is a fundamental difference between sectoral demand effects and effects asso-
ciated with excesses of aggregate demand. A supply-side shortage (or an increase in prices in one
sector) induces a shift in demand to other goods and services or a reduced supply of labor.38
A sudden increase in demand for a particular good can be inflationary in the presence of sec-
toral supply constraints in that sector. Likewise, the pandemic itself induced large sectoral shifts
in demand with similar effects. Were there perfect symmetry in price responses—an increase in
demand in one sector giving rise to a price increase of the same magnitude as a price decrease
that resulted from a decrease in demand in another sector—such demand shifts would not be
inflationary. But that is not the case. For various reasons, shortages typically give rise to much
larger price increases than the decreases associated with surpluses. Well-recognized downward
nominal rigidities mean that firms do not lower prices when there is a surplus as much as they
raise prices when there is a shortage. Moreover, with capacity constraints, a small shift in demand
can give rise to a large shortage; the marginal cost of increasing output is large, so prices even in
a competitive market would rise considerably. But if the marginal cost curve below current levels
of production is relatively flat (the way it is traditionally depicted), the decrease in price when
demand decreases is limited.39 Thus, large demand shifts are typically associated with increased
inflation.
The appropriate policy response to sectoral demand shifts is markedly different from inflation
arising from excess aggregate demand (Bloesch, 2022a). It does not entail reducing aggregate
demand but rather directly addressing supply constraints. As firms sort out which shifts are
permanent, there will be supply-side responses. Whether the demand shifts are temporary or
permanent, disinflationary processes will be set in motion.40

3.4. There were large shifts in patterns of demand for housing

An increase in the housing rent component of the CPI has been an important source of infla-
tion, contributing 0.6 percentage points to the annualized 8% for 2022 inflation as of October
2022.41 Rents are important because housing costs make up around a third of CPI.42 The
good news is that, for reasons explained in the following, these increases are likely to moderate
significantly.
How do we explain the significant rent rises that have occurred? Knowing the answer says
a lot about where rents are likely to go and what might be done about rent inflation. It is not
as if the number of Americans needing or wanting housing suddenly increased. Indeed, in the

35 Fitch (2022).
36 See Global Container Freight Index (Freightos Data, 2022).
37 BLS (2022c).
38 The ways in which a shortage of supply of particular goods interacts with labor supply and the demand for
other goods were a major subject of earlier disequilibrium macroeconomics (see, e.g., Solow and Stiglitz, 1968), with
insights applied into the recent pandemic explained in Stiglitz and Guzman (2021).
39 These responses are amplified in imperfectly competitive markets, where price is set as a markup over marginal
costs. See the following discussion.
40 One unanswered (and essentially, for now, unanswerable) question is to what extent some of the observed shifts
in demand are permanent. For instance, it is likely that there will permanently be more working from home than that
before the pandemic in the parts of the economy where that is feasible.
41 BLS CPI; authors’ calculations.
42 Taken from BLS CPI Weights (BLS 2022d).
The causes of and responses to today’s inflation 19

pandemic, with the loss of over 1 million lives and restrictions on immigration, population was

Downloaded from https://academic.oup.com/icc/advance-article/doi/10.1093/icc/dtad009/7071722 by National Science & Technology Library user on 09 March 2023
well below trend and that should also reduce the demand for housing.43 At the same time, the
demand for office space was reduced, which should have led to lower real-estate prices. Instead,
gross rent for retail properties44 began increasing as early as May 2020, exceeding pre-pandemic
levels by July 2020 (BLS, 2022e).
What seems to have happened in the pandemic is that many people wanted to move since
they could live anywhere if they could work from home. If people could not interact (due to
COVID-19 and necessary restrictions in place), cities became less attractive. Remote work likely
had an impact on the kinds of housing people wanted, with many looking for more space at home
(correspondingly, this reduced the demand for commercial real estate).45 Increases in residential
rents, of course, get reflected directly in the CPI, while the reductions in commercial real estate
get reflected only indirectly, as prices slowly decline in response to lower overall costs of doing
business. (So, a program of conversion of real estate from commercial to residential is an example
of a policy that might be more successful in reducing inflation than simply raising interest rates.)
If adjustment processes were smooth and symmetric, the increased demand for some types of
residential real estate would be offset by decreased demands for others, and there would then be
little net effect. But adjustment processes are neither smooth nor symmetric. Homeowners are
reluctant to take losses—or to accept a price lower than they think the house is worth. So too
for landlords.46 This means price reductions are sluggish, price increases can occur very quickly,
and overall, there is an increase in the average price.47,48
There are further technical problems in the measurement of housing costs in the CPI. Some
two-thirds of Americans own their homes. They do not pay rent. But the CPI pretends they do.
The CPI imputes (i.e., guesses) what homeowners would pay if they had to rent their homes.
Because in many areas rental markets are thin and unrepresentative of housing more generally,
what happens in the rental market is not a good indicator of rental values. Moreover, in the
approach taken, homeowners in areas where prices and rents are booming are treated as if they
are worse off because their “imputed” rent goes up—even though they may in fact be better off
because they have become much wealthier. The CPI measure can be badly misguided for the
two-thirds of Americans living in their own home.
Moreover, the numbers used by the US BLS (which calculates the CPI), while perhaps providing
the most comprehensive and accurate metrics, lag by 6–12 months behind the private indices (like
Zillow, 2022) that focus on new rentals.49 This bodes well for the future: the rent component of
CPI is likely to decrease within the next year.
There is a further detail illustrating the complexity of housing dynamics.50 Many people went
home to live with their parents when the pandemic began. This, together with other aspects
of housing dynamics already discussed (people leaving urban areas), led to lower rental prices,
which resulted in a significantly smaller number of individuals living in the average rental unit.
Since most of these people have leases, this effectively creates a short-term scarcity in rental
properties and drives up rents. There is a temporary “overconsumption” of housing by those
who signed longer-term leases at favorable terms As leases expire and as Zoom meetings become
less central to life, this trend will be corrected and rents (adjusted for inflation) can be expected to
normalize.

43 To be sure, we have been underinvesting in housing since the financial crisis, which has provided a fertile ground
for a housing shortage (Baker, 2022b).
44 Includes any incidental charges paid by the tenant (from the Producer Price Index).
45 Recent studies have shown that remote work accounted for more than 60% of the surge in house prices between
November 2019 and November 2021 (Kmetz et al., 2022).
46 Moreover, if they believe that overall prices are rising, misunderstanding overall trends from those in their
particular locale, they will believe it pays to leave their apartment vacant rather than accept a rent that is too low. The
expected gain in total (discounted) rental payments from potential increases in the monthly rental rate would exceed
the cost of leaving the unit vacant for another month.
47 Moreover, converting commercial real estate to residential takes time.
48 These asymmetries are likely also to play out as the Fed raises interest rates. Raising interest rates over the long
run tends to reduce house prices from what they otherwise would have been. The downward adjustment is slow, but
the increase in mortgage rates is fast. So new homeowners and those increasing the size of their houses are likely to face
higher living costs and experience high inflation (as opposed to measured inflation).
49 See Adams et al. (2022).
50 We are indebted to Justin Bloesch for drawing our attention to this.
20 J.E. Stiglitz and I. Regmi

3.5. Corporate profit markups increased during the pandemic and are driving up
inflation
Increased costs and shortages explain some of the increased inflation. In some sectors, the shifts
in demand discussed earlier are creating shortages that would result in higher prices even in com-
petitive markets. But something else is happening. Companies are doing more than just passing
on cost increases.
The US economy has been characterized more and more by increasing market power (Gutiérrez
and Philippon, 2019; Stiglitz, 2019), and when there is market power, firms increase prices more
than increases in costs. Prices are a markup over (marginal) costs. Thus, if only energy prices were
the original source of inflation, firms with market power would not just pass on their increased
costs in the form of higher prices but would raise prices by even more, generating higher profits
for themselves.
But matters are even worse. Firms have increased the amounts by which they mark up costs.
Between 1960 and 1980, markups averaged 26% above marginal costs and have been on a slow
and consistent rise ever since. The average markup charged in 2021 was 72% above the marginal
cost. Moreover, 81% of the average increase in markups from 1980 to 2019 came from increases
within industries, pointing to a generalized increase in market power.
The pandemic has given rise to an even starker increase in markups (Konczal and Lusiani,
2022), as firms with the most market power drove the sharp increase in aggregate markups in
2021 (Figure 20).
This is consistent with the widespread belief that companies with market power are taking
advantage of the current situation to increase their profits (Groundwork, 2022).51 Profit margins
are the highest they have been in more than 70 years.
As seen in Figure 21, while profits were increasing steadily since 2010 and market concentra-
tion was also rising steadily, corporate profits increased sharply in 2021, exceeding pre-pandemic
levels. In addition, corporate profits continued to rise through the third quarter of 2022 even as
inflation increased. This rise in profits aligns with an analysis of earnings calls done by Ground-
work Collaborative, which concludes that an overwhelming number of corporations claimed
that inflation (i.e., higher prices for them) was good for business and that they did not intend
to reduce prices even as input costs came down sharply (Colgate-Palmolive, 2022; Motley Fool
Transcribing, 2022).52

51 Standard economics raises a question: Why should corporations with market power choose to exercise that
market power more now, amid this crisis? Korinek and Stiglitz (2022) provide a variety of answers to this apparent
puzzle. For more details, see also the following discussion.
52 Profits and markups can increase even in competitive sectors. The high price of energy would lead to increased
profits and prices above costs (markups) whether the fossil fuel sector was competitive or not. Parsing the relative
The causes of and responses to today’s inflation 21

Market power is particularly evidenced in certain sectors that are key for consumer inflation.
Some economists (Ghosh, 2022; Russell, 2022; Sahay, 2022) have suggested that the high con-
centration of market power in, for instance, wheat provides ample scope and incentive for market
manipulation. Four firms control 70%–90% of the global wheat trade (IPES, 2022).53
There is a more benign interpretation, still related to market power, of what has happened
to markups. Even with the limited market power conferred by search costs—even in sectors
with many firms, each faces a downward-sloping demand curve—one would expect prices to
be increased by more than costs. In today’s world, one would expect the heightened sense
of uncertainty associated with the pandemic, the war in Ukraine, and central banks rapidly
raising interest rates, to further exacerbate markups. In the well-established Phelps-Winter
(1970) theory of customer markets, firms face a trade-off: if they raise prices, current profits
are increased, but this comes at the expense of future profits as customers search more, with
some finding another seller with cheaper prices or goods more to their liking. With increased
uncertainty, firms put more weight on the present and thus are more likely to increase their
prices. (As we note in Section 7, however, this model suggests that raising interest rates may be
counterproductive.)
Increased concentration has had another (unintended) effect: it has made the economy less
resilient and has worsened the impact of underlying supply-side interruptions, which was glar-
ingly evident in the disastrous baby formula shortages. These shortages, in turn, contribute to
inflation.
For our purposes, the reason for the greater exercise of market power and the nature of the
adverse consequences of market concentration are of secondary importance. What is key is that
(i) increased markups associated with increased market power provide an explanation that is
different from that provided by the “excess aggregate demand theory” and is more in accord
with the evidence; (ii) increased interest rates will do nothing to reverse these price increases and
may make matters worse; and (iii) there are alternative policies that directly affect the exercise
of market power—and would have benefits in their own right, independent of any impact they
have on inflation.
The flip side of firms passing on more than their cost increases to consumers is that workers
have seen declining real wages, which we discuss in the next section.

importance of the supply constraints discussed in the preceding subsections and that of market power is beyond the
scope of this paper.
53 Even with competitive markets, a belief that prices are going to rise in the future would induce farmers to
withhold supply today, in the hopes of making more money by selling in later periods.
22 J.E. Stiglitz and I. Regmi

4. The labor market is not a major driver of inflation54

Downloaded from https://academic.oup.com/icc/advance-article/doi/10.1093/icc/dtad009/7071722 by National Science & Technology Library user on 09 March 2023
The labor market has received the most attention of all the potential supply-side problems. The
pandemic created disruptions in the labor market unparalleled in nature and scale. Vacancies and
quits both rose dramatically as the economy emerged from the depths of the pandemic. Those
arguing early on for strong monetary tightening claimed (i) a wage–price spiral had been set in
motion and (ii) there had been such fundamental changes to the structure of the labor market that
to bring down inflation to 2% would require persistently high unemployment for an extended
period of time, as long as 5 years.55
The preceding section’s analysis suggests that as the world recovers from the pandemic and
war shocks, disinflationary forces may be unleashed without the need to increase unemployment
at all. But even if these disinflationary forces are not as strong as they now seem (or if the war
lasts longer than we currently expect), we argue here that (i) the evidence for whether the labor
market is very tight is at best ambiguous; (ii) the evidence for whether there has been a shift in
the Phillips curve and other labor market relations is also at best ambiguous; (iii) there is little
compelling evidence that the economy is likely to experience a wage–price spiral; and (iv) if there
are significant labor market shortages, there are better policies to alleviate these shortages than
raising interest rates.
While there are still aspects of the labor market that are abnormal—the employment-to-
population ratio remains at 1 percentage point below the pre-pandemic level—the decline is
half that which occurred during the 2008 financial crisis and conditions are recovering quickly.
The huge difference between the employment-to-population ratio in the United States and New
Zealand (another country with a large COVID-19 relief package)—8 percentage points higher—
suggests that pandemic effects are small relative to other determinants, some of which might be
altered over time, especially if the right policies were put in place.
This section is divided into three parts. First, we present the “big picture”—the broad indi-
cators that the labor market is not as tight as some claim. Next, we explain the overwhelming
evidence that suggests wages have moderated sufficiently and there should be little concern of an
uncontrolled wage–price spiral. Finally, we argue that if there were tightness in the labor market,
the appropriate remedy is not to throw the economy into a recession through excessive monetary
tightening but pursue supply-side fiscal and regulatory policies to expand the labor force.
Appendix 4 addresses two questions that have loomed large in the policy debates. First, why
were US labor market dynamics so different from those in other countries? We review the drama
of the pandemic, explaining how poorly designed policies led to unnecessary and excessive labor
market turmoil. Second, does the Great Resignation—high quit and vacancy rates—portend high
wages and a long road ahead to getting inflation down? We suggest not. We conclude Appendix 4
with a cautionary note against basing policy on a model that has become central to macroeco-
nomic analysis: the Phillips curve, which is the theoretical relationship between unemployment
and inflation. The curve has proven unreliable, especially in periods of marked changes in sectoral
relative prices, like the one we are currently in.

4.1. The big picture

The COVID-19 pandemic shifted both the demand for, and supply of, workers in frontline
and close-contact occupations, resulting in a one-off repricing of wages.56 But rather than
the sustained acceleration of wage and price increases that characterizes the feared wage–price
cycle, current trends are more consistent with a shift in the level and structure of wages.
As seen in Figure 22, the rate of nominal wage growth has moderated as of October 2022.

54 This section has especially benefited from discussions with Justin Bloesch and incorporates many key insights
from his October 21, 2022, Roosevelt Institute blog post, “Why Unemployment Can Stay Low While We Fight Inflation”
(Bloesch, 2022b).
55 Lawrence Summers, former treasury secretary and a strong advocate of the “excess aggregate demand” theory
of inflation, has said that the United States would need 5% unemployment for 5 years to combat inflation (Summers,
2021; Aldrick, 2022; Tully, 2022; Domash and Summers, 2022a, 2022b).
56 This reduced wage inequality, with the highest rate of wage growth occurring in the lowest quartile of the income
distribution. This was because most occupations in the frontline, close-contact, and essential job sectors were low wage
and a high proportion of these “essential workers” were Black, other people of color, and women (Holder et al., 2021).
The causes of and responses to today’s inflation 23

Downloaded from https://academic.oup.com/icc/advance-article/doi/10.1093/icc/dtad009/7071722 by National Science & Technology Library user on 09 March 2023
Figure 22. Wages and salaries for private workers, all industries, and occupations
Note: Data for average hourly earnings show a similar pattern and levels, with the rate of increase falling from
around 1.8% in the summer of 2021 to somewhat around 0.8% in the fall of 2022.

Recently, the 3-month percentage change in the Employment Cost Index (ECI) is only (at an
annualized rate of) around 1.6 percentage points higher than it was pre-pandemic, hardly a
source of concern of “runaway” inflation. All of these have occurred with little change in the
unemployment rate—refuting the claim that wage inflation can only be tempered through large
and persistent increases in the Phillips curve.57
More broadly, in forthcoming research, David Autor, Arindrajit Dube, and Anne McGrew
(Autor et al., 2022) demonstrate that wage increases have been mostly concentrated in the bottom
quartile of the income distribution. This serves to counteract the claim that the reduction in labor
force participation (which has largely reversed)58 —is the result of individuals who were enriched
by pandemic payments withdrawing their labor supply. Low-income individuals, living on the
edge, largely spent what they were given. While on average they had some extra savings and
liquidity59 —substantial increases compared to what they had before—these are not enough to
rely on. Particularly for those in the bottom quartile, those who can work will have no choice
but to work, if they can find a job.
The good news is that there has been some wage compression—quite desirable given concerns
about the growth of wage inequality in recent decades. But now that this (limited) “leveling” has
occurred, there is little reason to believe that wages for these workers will continue to rise at a
rapid pace; Figure 23 shows the rapid decrease in the growth of retail workers’ and leisure and
hospitality workers’ average hourly earnings. Indeed, the former has fallen below the average
growth in the period of 2018–2019.
The strong wage moderation implies that wage growth has lagged behind inflation, as shown
in Figure 24. Real wages have been decreasing by 2.9% in Q1 of 2022 and 3.5% in Q2 of 2022.
Most recently, real wages (average hourly earnings) in October 2022 were 2.3% lower than a
year earlier. The best indicator of a tight labor market is increasing real wages, so the fact that they
are falling strongly suggests otherwise. But labor markets are complex, and no single number, not
even real wages, gives a full picture of what is going on.60

57 There are some complexities in interpreting the data caused by compositional changes in the labor force. The
recent marked slowing of hiring of workers in low-paid sectors suggests that these compositional effects may even imply
that the “composition-adjusted” decline in wage inflation is even greater.
58 At the time of this writing, it stands at little over 62%. While this is more than a percentage point below the pre-
pandemic level, it is at the same level as it was in 2015, when weak aggregate demand was widely seen as contributing
to weak labor force participation.
59 As Aladangady et al. (2022) point out, “… most excess savings have been held by households at the top half of
the income distribution.”
60 Later, we provide alternative explanations, focusing on wage–price dynamics, for the decline in real wages.
Again, we note the necessity of adjusting for compositional effects, but that doing so does not change the basic picture.
24 J.E. Stiglitz and I. Regmi

Figure 24. Average hourly real earning of all employees

There are other indicators that the labor market is not as tight as people in favor of large inter-
est rate increases claim. The number of self-employed people, part-time workers, and employees
with short average working hours represent disguised forms of unemployment that underesti-
mate the labor market’s slack.61 As seen in Figure 25, the U6 unemployment indicator, which
includes total unemployed plus part-time workers and those marginally attached to the labor
force, remains much higher than the headline unemployment rate.
Overall, then, the picture that emerges is of a labor market less tight than some have claimed,
with considerable scope for increasing the workforce especially if wages and working conditions
were improved. Further evidence will be presented in Appendix 4, where we look at recent move-
ments in quits and vacancies, and in the following discussion, where we show that US labor force
participation is much lower than in other advanced countries. Earlier observed wage increases
are more consistent with a picture of shifts in the level and structure of wages—partly tempo-
rary, partly permanent—than of a picture of an economy with out-of-control wage inflation.
Indeed, the wage moderation already observed provides strong counterevidence to an incipient
wage–price spiral. We now turn to these wage–price dynamics.

61 Early in the pandemic, those numbers indicated a less tight labor market than one might have been led to believe
on the basis of the headline unemployment rate, but since then they have recovered to more normal levels (Klein 2022).
Still, even as of the writing of this paper, the number of self-employed persons has, for instance, remained above pre-
pandemic levels. As of October 2022, the number of self-employed persons across industries is over 9.9 million (BLS
2022f), slightly more than pre-pandemic levels of 9.6 million (in October 2019)
The causes of and responses to today’s inflation 25

4.2. Wage–price dynamics

At the center of the worry about the Fed and other central banks getting “behind the curve” is
that the banks may have unleashed a wage–price spiral because they did not act quickly enough.
If workers come to expect higher inflation, they will demand higher wages, and the increase in
wages will then lead firms to increase prices.
These really are empirical questions: To what extent do price increases (or expectations of
price increases) get reflected in wage increases? To what extent do current price increases get
reflected in expectations of price increases? The answers to these questions clearly depend on
market structure, the openness of the economy, the market power of firms, and the market power
of workers.
For instance, workers might like to recuperate the losses they have been experiencing due to
inflation, but the evidence (cited earlier) is that they have little power to do so, even if in the past
they were able to. In a globalized, competitive economy, if workers in traded-goods sectors were
to demand higher wages, their jobs would be in jeopardy.62 But such constraints also have an
impact on non-traded sectors. In particular, in a world of competitive labor markets, the only way
that a change in the price of goods consumed by individuals (such as rent or food) would affect
wages in restaurants, for example, is through labor supply effects (typically small, especially in
the short run) or general equilibrium demand effects.63 If wages do not increase with prices then
there cannot be a wage–price spiral, no matter the extent to which wages get reflected in prices.
Of course, for globally traded goods in competitive markets, US wages should not matter.
Some economists emphasize expectations in driving inflation. More recent theories and evi-
dence have questioned this hypothesis (Rudd, 2021). But in any case, to date, inflationary

62 The extent of globalization has been affected both by the pandemic and global geopolitics. Moves away from
globalization may reduce the degree of competition in the market, affecting both labor and product markets. In the short
run, increased power to raise prices may result in more inflation, as we suggested in Section 2. The evidence presented
in this section strongly suggests that, overall, workers’ bargaining power has not increased. Recent research in labor
markets has emphasized the importance of monopsony power, with an increase in monopsony power also driving down
real wages (Ashenfelter et al., 2022; Bassier et al., 2022). Parsing the role that these various factors play in increasing
markups, described in Section 6, remains unsettled.
63 This is another arena in which simplistic aggregative macroeconomic models may be misleading. In such models,
there is no difference between real consumption wages and real product wages. But, as in the Great Depression, there
can be large changes in relative prices (and even more, in the presence of shortages, in “shadow” relative prices). This
distinction plays an important role in the analysis of the Great Depression (see Greenwald et al., 1988). It may help
explain why movements in real wages (using the CPI, e.g.) may not be indicative of labor scarcity. (During the Great
Depression, agricultural prices fell by some 50%–75%, leading to increases in real consumption wages. But it would
be a mistake to read from this that the labor market was tight!) There is one more reason that movements in real
wages might not be fully reflective of the tightness of the labor market. Nominal wages and prices respond separately
to labor shortages (surpluses) and goods shortages (surpluses) in an uncoordinated way. Lags in adjustments mean that
real wages—nominal wages divided by nominal prices—may decrease even when the unemployment rate is below the
natural rate. For an early exposition of these wage–price dynamics, see Solow and Stiglitz (1968).
26 J.E. Stiglitz and I. Regmi

expectations as reflected either in market prices or in consensus forecasts have been mean-

Downloaded from https://academic.oup.com/icc/advance-article/doi/10.1093/icc/dtad009/7071722 by National Science & Technology Library user on 09 March 2023
reverting and firmly anchored,64 precisely what one would have expected if market participants
shared even part of the diagnosis of inflation that we have presented here.65
The bottom line of this analysis is simple: fears of a wage–price spiral seem greatly exaggerated.
The evidence presented earlier in this section shows that nominal wage inflation is already being
tempered.

4.3. Policy responses

We have seen that wage increases are not at the heart of today’s inflation. In any economy going
through the magnitude of structural changes that we have experienced, particular firms or sectors
may find it difficult to hire the workers they need and especially so if they are reluctant to raise
wages or improve working conditions.66 If aggregate labor shortages do exist, the best way to
address them is not by a wholesale reduction in aggregate demand, the effects of which would
be pernicious, but to increase labor supply. The US employment-to-population ratio and labor
force participation rate, particularly among women, are low compared to many other advanced
countries and much could be done to increase them. Unfortunately, up-to-date comparable data
are not available, but as of 2021, according to the World Bank, the employment-to-population
ratio of 57% was significantly below the nearly 63% level attained earlier this century.67 This
was lower than the UK’s (60%) or New Zealand’s (67%). Results are similar if we look at the
ratio of the working-age population who are employed.68 This suggests there is much scope for
increasing the labor supply. (There are many reasons why working-age people may not be in the
labor force: e.g., they may be early retirees or not in the labor force because of illness, disability,
or family responsibility.)
Increasing pay, improving working conditions,69 making employment more flexible (more
working from home, more flexibility in hours, etc.), and providing better childcare70 are among
the ways to increase labor force participation. And maintaining a tight labor market is a way to
induce employers to offer workers good wages and working conditions. Slowing the economy
down will have the opposite effect, reinforcing wage and income inequalities—including across
races, ethnicities, and genders—and likely further reducing labor force participation.71

64 Inflation expectations, especially over the long run, have not increased in tandem with inflation. The Federal
Reserve’s 10-Year Survey of Consumer Inflation Expectations has increased from the low of 1.15% in the depths of the
pandemic to 2.37 in October 2022—still very moderate (Federal Reserve Bank of Cleveland, 2022). Other series, such as
that of the University of Michigan and the “Implied Expectations from Treasury Inflation Protected Securities (TIPS),”
give a similar picture. For instance, the 1-year inflation expectation from the University of Michigan is, naturally, higher
but still below current inflation: it increased from 2.1% in the depths of the pandemic to 5.4% in April 2022 but by
September had come down to 4.7% (Federal Reserve Bank of St. Louis, 2022a). And the 10-year expectation based on
TIPS increased from 0.63% in the depths of the pandemic to 2.25% on November 18, 2022, having come down from
a peak in April of 3.02% (Federal Reserve Bank of St. Louis, 2022b).
65 At the same time, the limited increase in inflationary expectations could in part be due to a widespread belief
that were inflation to increase significantly, central banks would increase interest rates, even though rational market
participants should recognize that unless such increases generated a marked global slowdown, they would be unlikely
on their own to do much about the underlying drivers of today’s inflation.
66 As is the case when firms have monopsony power. Note that in competitive labor markets, employers would
never complain about a labor shortage, though they might complain about higher wages cutting into profits. Still, in
competitive product markets, prices would adjust to restore returns to a competitive level.
67 Based on the most recent data (World Bank [Modeled ILO Estimate], From ILOSTAT database, International
Labour Organization,) available as of June 2022 (World Bank, 2022). The International Labour Organization (ILO)
adjusts national data to a common conceptual basis to create a harmonized or standardized rate of employment that is
suitable for an international comparison. These numbers vary from US BLS estimates. The BLS notes that harmonized
data for comparison may not be able to adjust for all demographic and other differences.
68 Because of differences in the demographic structure, the ratio of employment to working-age population, rather
than employment to population, may be a better indicator. The United States looks no better using these numbers. For
instance, based on recent data, the US number of 71.3% is markedly below that of Canada, at 75.4%, and even more
so than Australia at 77.4% or Japan at 78.5% (OECD, 2022c).
69 Paid family leave has, for instance, been linked to systematically higher labor force participation and higher
worker retention (Rossin-Slater, 2017).
70 The inadequacy of supportive policies proved to be particularly relevant in the pandemic with school clo-
sures. Lack of adequate childcare and family support suppresses labor force participation, particularly for mothers
(Duran-Franch and Regmi, 2022).
71 By 2031, sustained demand and closing gender and racial gaps in education and wages could draw into the labor
market 28 million workers more than the CBO’s estimate (Mason et al., 2021).
The causes of and responses to today’s inflation 27

5. The rise of inflation has been global; the United States is not an outlier
Those who blame US inflation on excess demand focus on the high level of US government fiscal
spending during the pandemic. But if the high spending led to inflation, then US inflation should
be greater than elsewhere. However, regardless of their policies and stances over the past 3 years,
most Organisation for Economic Co-operation and Development (OECD) countries experienced
higher inflation than before the pandemic. The reason is straightforward: the key sources of
inflation, the supply-side effects such as supply chain disruptions, are international. All countries,
regardless of how they addressed the pandemic and deployed fiscal stimulus, are struggling with
the challenges of reopening their economies. Of course, these challenges play out in different
ways. With Europe more dependent on Russian gas and with an electricity pricing system in
many European countries excessively linked to the price of gas, the war in Ukraine has taken
a greater toll there. A country like the United States, with more dependence on cars, will show
more inflation when car prices soar.
To better understand the sources of inflation, we first look at the change in inflation against a
pre-pandemic baseline. According to OECD inflation data, the annualized rate of change in US
inflation between pre-pandemic (between December 2017 and 2019) and post-pandemic levels
(between December 2020 and June 2022) was 6.9 percentage points, only slightly higher than
the average of the rest of the advanced economies (excluding Turkey) at 5.6 percentage points
(OECD 2022d, authors’ calculations) (see Figure 26).72
Second, we want to look at core inflation (Figure 27). Recall that core inflation excludes the
volatile energy and food sector. Analyzing core inflation is important for comparison especially
because Europe’s level of dependency on Russian energy sources meant that the direct impact
of the Russian invasion of Ukraine was higher on European energy prices (though, as we noted
in Section 3, energy prices do seep into core inflation). Figure 27 shows that the change in the
US inflation rate is more pronounced but still limited. More granular data show that the gap

72 A full comparison of different countries is obviously far more complicated. Results can vary moderately across
different indices. The ways countries form their price indices vary across the board (Baker, 2022b). Baker (2022b)
points out that inflation was even higher for used vehicles than for new vehicles. This could play an important role
in the difference in the United States’ and Europe’s inflation rates because the United States includes used and new
cars’ prices in price indices while Europe includes only new cars’ prices. Differences in consumption or output baskets
also play a role. Moreover, as observed later, there are many differences in the policies pursued across countries, with
other countries pursuing policies that were more effective in maintaining links between workers and their employees.
Parsing the role of each policy (in particular, the higher levels of fiscal support) is virtually impossible. Finally, there
are important structural differences between countries that lead to dissimilar impacts of shocks. Higher market power
in the United States than in many other advanced countries—and therefore higher markups—can give rise to a larger
increase in prices in response to an increase in costs (say, from an increase in the price of oil).
28 J.E. Stiglitz and I. Regmi

between levels of core inflation in the United States and other countries decreases over time as
core inflation catches up rapidly in other countries.73
Given the markedly stronger growth in the United States than in other advanced countries,
it is not surprising that the United States might experience some higher core inflation (though,
as we have argued, it is not the excess of aggregate demand relative to potential output that is
giving rise to the inflation), but what is remarkable is how small the difference is.74 Moreover,
the most recent monthly and quarterly core inflation data from the OECD put the US Q3 rate at
6.3% behind the average for core inflation (7.2%, including Turkey).75 OECD inflation forecasts
expect inflation rates in several OECD countries to far exceed US inflation in Q4 of 2022.76
There are reasons other than the difference in pandemic spending and the technical issues
referred to in footnote 75 that would lead one to expect a greater increase in inflation in the
United States than in other advanced countries. We note four in particular.
First, the higher weight put on automobiles in the US CPI (over 9% compared to about 3.6% in
France for vehicle purchases),77 while normally not particularly noteworthy, becomes important
when higher car prices are a major cause of inflation.
Second, in the previous section, we noted the increased labor market turmoil attributed to US
pandemic policy that led to less job retention.78 This weakening of worker–employer connec-
tions would be expected to increase labor mobility, lower labor force participation, and induce

73 Since April 2022 US core inflation has been below OECD average core inflation, with a gap of 0.9 percentage
points as of August 2022 (USA 6.3 and OECD 7.2). US core inflation exceeded OECD core inflation from April 2020
to 2022, with a peak gap of 1.4 percentage points in June 2021 (USA 4.5 and OECD 3.1). The OECD average includes
Turkey, which has long had a very high inflation rate (OECD, 2022a).
74 In October 2019, the IMF projected that the United States’ output would grow 2.1%, Germany 1.2%, France
1.3%, and the UK 1.4% in 2020; in 2024 the projected growth rates were 1.6% for the United States, 1.2% for
Germany, 1.4% for France, and 1.5% for the UK (IMF, 2019). In the IMF’s October 2022 report, growth of output in
2020 was given as −3.4% in the United States, 13.7% in Germany, −7.9% in France, and −9.3% in the UK. Growth
in 2021 was 5.7% in the United States, 2.6% in Germany, 6.8% in France, and 7.4% in the UK. In 2022, growth is
forecasted to be 1.6% in the United States, 1.5% in Germany, 2.5% in France, and 3.6% in the UK (IMF, 2022). Some
claim that there have been large spillovers to other countries from US-induced global goods inflation, without which the
differences of inflation would be higher. But were overall excess demand the real source of inflation, we would expect
higher (increased) inflation in non-traded goods, such as services. For a comparison, see Figure 27.
75 Organisation for Economic Co-operation and Development (OECD) (2022a).
76 As of November 22, 2022, forecasted inflation for Q4 2022 is 5.7% for the United States, which is below many
OECD countries, including Italy (5.9%), Germany (7.2%), the UK (10.2%), and the average for the Euro area (6.8%)
(OECD, 2022b).
77 For the weights assigned to cars in the US CPI, see BLS (2022g). For the weights assigned to cars in the French
CPI, see European Central Bank (2020).
78 Interestingly, US reliance on its unemployment schemes did not save the government any money. Higher unem-
ployment rates, as well as the overall weakness in preexisting social safety nets in the United States, necessitated higher
spending on unemployment benefits, which was closer to the average amount spent in EU countries on job retention
schemes (Kammer and Arnold, 2021).
The causes of and responses to today’s inflation 29

sectoral shortages—including in non-traded goods—leading to inflation as the economy struggled

Downloaded from https://academic.oup.com/icc/advance-article/doi/10.1093/icc/dtad009/7071722 by National Science & Technology Library user on 09 March 2023
to return to normal.
Third, housing costs are, as we have noted, an important component of the CPI and the mag-
nitude of increases in housing (rents) also sets the United States apart from many countries. We
noted in Section 3 that large shifts in demand can give rise to higher prices because of asymme-
tries of adjustments—with prices going up in areas with increased demand more than offsetting
decreases in areas of decreased demand. The pandemic’s impact on the structure of demand for
housing, for example, such as where people want to live and how much space they would like,
seems to be more pronounced in the United States than in other countries. A geographically
large country like the United States with a mobile population makes relocating much easier and
more lucrative for workers. Organizational restructuring toward online and remote work may
accordingly induce more relocation, generating more disruption in the housing market.79
Finally, higher market concentration in the United States relative to Europe (Gutiérrez and
Philippon, 2019) is also likely to have resulted in a greater increase in prices. We saw in Section 3
that firms and sectors with more concentration (market power) increased markups more.
The overwhelming picture that emerges from these data is consistent with this paper’s central
message: globally shared supply shocks are driving inflation. It is not excessive aggregate demand
in the United States, as claimed by those who wish to blame the United States’ inflation on
“excessive spending,” including spending associated with the American Rescue Plan.80

6. Parsing the roles of demand and supply

Because of the interdependence of all sectors and all factors on each other, it is nearly impossible
to precisely pinpoint the role of any one element or set of elements in contributing to today’s
inflation. This makes it difficult to have much confidence in predictions of the course of inflation
within any given policy framework. For instance, an increase in the prices of goods like food,
energy, utilities, capital goods, and—subsequently—transportation affects the prices of a wide
range of services. Moreover, a lack of supply in one sector gets reflected in an increase in demand
in other sectors.81 There is a shift in demand, which that sector sees as an increase in demand.
But, as we have noted, it would be wrong to read this as evidence of an excess of aggregate
demand.82
The critical question is whether aggregate demand is the problem or whether it is sectoral
shifts and supply-side problems. The previous section analyzed what might be viewed as a nat-
ural experiment: the United States injected more money into the economy. Did it result in more
inflation? Not to the extent one would expect, at the time one would expect, or in the places one
would expect if that injection were the source of inflation.
If the American Rescue Plan were the source of the problem, one would expect inflationary
pressures to show up most in non-traded goods—the sectors special to the United States, as
we noted in Section 4. This is not the case, except for rents, and we have discussed the unique

79 There are other differences in housing markets across countries. For instance, we noted in Section 3 the unre-
liability of the CPI rent component as an indicator of housing costs. The rental market on which the imputations are
based is thinner in the United States than in a country like Germany, where it is more dominant and accordingly may
be more unreliable. By the same token, the adverse welfare effects may be greater in Germany than (on average) in the
United States.
80 Unfortunately, it is hard to construct really clean tests of the hypothesis that, had it not been for the ARP, inflation
would have been significantly lower. The pandemic shifted demand in the United States to goods, much of which were
imported (observable in the data presented in Section 2), translating into goods price inflation, which affected inflation
(including core inflation) in countries around the world. Still, with non-traded goods making up two-thirds or more of
households’ consumption basket, one would have thought that if the driver of inflation were excessive aggregate demand
it would manifest itself in an especially large increase in non-traded goods’ prices and therefore in core inflation. This
does not seem to be the case. See the following discussion.
81 As we noted in the case of rents, with fully downward flexible nominal wages and prices, demand shifts would
have only limited inflationary effects because upward pressure in sectors gaining demand would be offset by downward
pressures in sectors losing demand. But with nominal rigidities and capacity constraints, price increases predominate,
which is part of the reason that periods of high disturbance—such as now—are inflationary.
82 Therefore, studies such as the one done by the Federal Reserve Bank of San Francisco (Kmetz et al., 2022)
attributing about a third of inflation to demand-side effects must be taken with caution. What these studies see as a
price increase from an increase in demand may have its origin in a supply perturbation.
30 J.E. Stiglitz and I. Regmi

features of that market. Core goods, which are mostly traded, contributed more to inflation in
2021 than did core services, excluding rents, which are mostly non-traded,83 which is illustrated
in Figure 28.
Since the money from the pandemic programs went overwhelmingly to low- and lower-middle-
income individuals, one would expect to see inflation especially high in goods consumed by these
households and in the rents they pay. To the contrary, we see that housing costs (which make
up a large part of CPI, and the increase in which has been a major source of inflation) are being
driven just as much by the shifts resulting from working from home, a phenomenon more rele-
vant to workers with higher levels of education and those with higher median earnings84 (Kmetz
et al., 2022). Food costs, which tend to make up a larger portion of the budget for low-income
households, point to a similar pattern. US food inflation is high (13% in Q3 2022) but has been
closely tracking the OECD average since the beginning of the pandemic, which suggests it is not
driven by US policies.85
More generally, it is hard to see how the ARP could have been the critical source of inflation
when, as we saw in Section 2, real consumption stayed below trend in the initial stages of inflation
and has largely remained so.
Would the United States have had almost the same level of inflation without the ARP? Global
energy and food prices would still be elevated. There is no reason to believe that firms with
market power would not have taken advantage of the situation, raising prices by more than
their costs increased86 ; nor is there reason to believe that the supply chain and other supply-
side problems associated with the pandemic, like the baby formula shortage, would not have
occurred.
The flip side of this argument is that a demand reduction will have a limited effect on inflation.
To be sure, with a sufficiently weak US economy, price increases will be muted and might even
come down; but the magnitude of the decline in US GDP and the resulting increase in unemploy-
ment required to bring down the prices of globally traded goods, or even to make a large enough
difference in the rate of inflation, is likely to be substantial.

83 The tradability indexes of CPI goods and services by the BLS confirm that the number of items classified as
services including rents are overwhelmingly non-traded, while core goods are overwhelmingly traded (Johnson, 2017).
84 A BLS study of Occupational Employment and Wage Statistics survey data, as well as a survey under the US
Department of Labor’s Employment and Training Administration, shows that 79.3% of participants with less than a
high-school diploma were unable to work remotely, whereas only 26.2% of respondents with bachelor’s degrees and
higher were unable to work remotely (Dey et al., 2020). The median weekly earnings increases with education.
85 Organisation for Economic Co-operation and Development (OECD) (2022a).
86 As we showed in Section 3.
The causes of and responses to today’s inflation 31

7. Implications of aggressive interest rate hikes

Economists focus on trade-offs: the benefits of tighter monetary policy in terms of reduced infla-
tion, and the costs in terms of lower real output and higher unemployment. The costs of lower
output and higher unemployment are real and tangible. In Federal Reserve Chair Jerome Powell’s
own words, the “unfortunate costs of reducing inflation” bring “some pain to households and
businesses” (Powell, 2022c). And, though Powell did not mention it, those costs are not spread
evenly. They are borne heavily by low-income individuals and marginalized groups, as we show
in Figure 29.
If our analysis is correct, however, the benefits will prove elusive. Inflation will be reduced only
a little from what it otherwise would have been unless we squeeze the economy so much that
unemployment becomes much higher than it is today. The Federal Reserve will not be able to do
much to contain the increases in prices coming from international markets,87 lack of investment
in supply chains, COVID-19 disruptions, climate change, the war in Ukraine, or the exercise of
market power.
Moreover, some (and perhaps many) of the factors causing today’s inflation will be resolved
over time—not because of the Fed’s action, but despite it. And if that is the case, we will have
paid a high and unnecessary price.

7.1 Why interest rate increases may be counterproductive

Raising interest rates will do little to contain inflation but could make matters worse. We argued
in Section 3 that supply-side shortages are the source of much of the inflation. Tighter mone-
tary policy makes it more difficult for firms to make the investments that might alleviate these
shortages.
There is another reason interest rate increases may be inflationary that is related to the long-
standing theory of Phelps and Winter (1970) about imperfect competition discussed in Section 3.
Even with the limited market power conferred by search costs, an increase in interest rates induces
firms to raise prices as they prioritize current profits over the loss of future profits that happen
when customers seek and find a different provider (Greenwald and Stiglitz, 2003).
Moreover, there is evidence (Dias and Duarte, 2019) that increased interest rates do get passed
on to consumers in the form of higher rents—directly contributing to higher inflation. There are
good reasons for this. In the short run, higher interest rates cause dwellers to move between
rented and owner-occupied housing, which leads to higher rents—the basis of CPI calculations.

87 Apart from limited effects that might arise from currency appreciation, which are likely to be at most temporary
as other countries match our rates, the reversal of the appreciation will itself be inflationary.
32 J.E. Stiglitz and I. Regmi

Moreover, landlords may try to pass along their increased “capital costs” to renters.88 In the long

7.2 Aggressive interest rate hikes will perpetuate existing inequalities and
reverse the gains from a strong recovery
Suppressing aggregate demand—translated into reduced economic activity and higher
unemployment—is the primary mechanism that interest rate hikes rely on to reduce inflation.
To the extent that investment and consumption are interest-sensitive, increased interest rates
reduce investment (and thereby growth) and consumption.90 Tighter monetary policy also may
get reflected in less availability of credit, thereby also reducing consumption and investment.
The effects of interest rate hikes will travel much faster through some parts of the economy,
while others will witness a considerable lag. For example, new home construction starts fell
quickly as interest rates increased. Contrary to some claims, tightening monetary policy does
distort the economy.91
Cutting the recovery short right now through excessive tightening of monetary policy will have
a particularly large effect on workers who are marginalized92 and have lower levels of education93
(disproportionately Black and Brown).94 These workers are the last to be hired in an economic
recovery, are in less stable and more interest-sensitive occupations, and work under precarious
conditions with less than adequate compensation.
The unemployment rate for Black Americans is nearly double that of White Ameri-
cans (Figure 29), so if we were to target a 5% average unemployment rate, implicitly the
“targeted” rate of Black unemployment would be twice as high, about 10%. Similarly, the “tar-
geted” rate of Black male unemployment would be almost four times as high, well in excess of
15%. Not surprisingly, this will have long-lasting effects (Williams, 2020).95

7.3 Global consequences and economic fragilities

The Fed’s interest rate increases are a different form of “beggar-thy-neighbor” policy (a policy
enacted by one country that results in a loss for another) than the one that played out in the Great
Depression because this time it involves inflation. Higher interest rates lead to currency appreci-
ation, which lowers import prices and reduces inflation in the United States but simultaneously
increases prices and inflation abroad.
Even worse, since other countries will likely match US rate hikes to mitigate these exchange rate
effects,96 there will be a global slowdown, dampening domestic exports and further weakening
aggregate demand.

88 As in the standard markup models. Because of search costs and product differentiation, rental markets are far
from perfectly competitive; as we have noted, in standard imperfectly competitive markets, firms (here, landlords) set
prices as a markup over costs. Even in highly competitive markets, behavioral economics suggests that landlords may
in the short run pass on costs; in the intermediate term, if the resulting prices are above market-clearing levels, there is
a process of gradual price adjustment.
89 An increase in the interest rate may increase the cost of capital more than—and faster than—it brings down the
price of housing (again, partly because of the dynamics of price adjustment, which also may exhibit downward price
sluggishness, if not rigidity, as noted earlier). There are other more complex channels through which higher interest
rates lead to higher rents. Higher interest rates lead to less construction, and the reduced supply of housing in the future
implies rents in the future will increase. But if landlords expect rents to be increasing, landlords who sign long-term
leases will insist on higher rents now; it may even benefit them to leave their property temporarily vacant, in anticipation
of getting a higher rent in the future.
90 The effect on consumption is unsettled. Target savers reduce savings when interest rates increase. Apart from
housing and the purchase of cars, aggregate demand may not be very interest-elastic. Financial innovation has had
complex effects on the relationships that firm and consumer activities have with the interest rate (Dynan et al., 2005).
91 New home constructions fell while employment in construction continued to grow. Eventually, of course,
employment in the sector will decrease. This illustrates the long and variable lags of monetary policy.
92 BLS (2022f).
93 Historically, periods of growth have resulted in reductions in unemployment levels especially for those with low
levels of educational attainment (BLS, 2022f).
94 Black and Latinx workers are disproportionately represented in occupations that are more vulnerable to
economic downturns and thus experience disproportionate job losses during downturns (Hoynes et al., 2012).
95 This paper shows that following the Great Recession, “[i]t took more than 10 years for Black workers’ incomes
to return to their pre-recession levels.”
96 More than half a dozen central banks, including in the UK, Norway, and Indonesia, have already, as of September
2022, followed the US Federal Reserve’s suit and increased their interest rates (Canepa and Schneider, 2022).
The causes of and responses to today’s inflation 33

And with so many firms (including in the United States) and countries around the world

Downloaded from https://academic.oup.com/icc/advance-article/doi/10.1093/icc/dtad009/7071722 by National Science & Technology Library user on 09 March 2023
overindebted—not a surprise given the long period of very low interest rates—the consequences
may be devastating. The dramatic changes in food and energy prices and foreign-exchange
rates (because of the asynchronous setting of interest rates) will only worsen matters. This
could lead to deep and possibly prolonged downturns in some countries. Risks are par-
ticularly heightened because of the growth of nontransparent derivatives and other hidden
maturity and foreign-exchange mismatches—evidenced dramatically by the near meltdown
of the UK’s pension system, which was saved only by strong intervention by the Bank of
England.
In the 1997 East Asia crisis, when the IMF responded with the conventional wisdom of
raising interest rates, Stiglitz warned that it could lead to massive bankruptcies and a deep
downturn, with capital fleeing the region. This would undermine one of the primary pur-
poses of raising interest rates, which is to support the exchange rate. The IMF took the
view that if that happened, the situation could be easily remedied with a simple reversal.
However, one does not “unbankrupt” firms simply by lowering interest rates. What was
predicted happened, with the region experiencing a deep downturn made worse by the unnec-
essarily high interest rates that the IMF had demanded. There were significant hysteresis
effects, with long-lasting consequences of mistaken policies. The same applies to the current
situation.
The main reason that things might not turn out so badly is that inflation in the United States
will be tamed on its own—for which, as we have suggested, there is already increasing evidence—
simply as the supply-side effects giving rise to inflation are tamed and reversed.

8. The need for a more significant role for fiscal and other policies
A series of supply-side problems (including those arising from broken supply chains and sec-
toral demand shifts) are the underlying driver of inflation today, and the best policies to address
today’s inflation are those that directly address these supply-side problems, with actions that
work quickly. Fiscal policies97 and other government interventions, tailored more directly to
reduce the drivers of today’s inflation, are likely to be more effective and less costly than raising
interest rates. and other government interventions, tailored more directly to reduce the drivers
of today’s inflation.98 Advances in macroeconomics over the past two decades have provided
a strong rationale for such government interventions—beyond the obvious one that monetary
policy may be ineffective, distortionary, or not timely.99
A comprehensive list of what measures might or should be undertaken is beyond the scope
of this paper; a few examples include expanding the supply of energy (such as the measures
included in the Inflation Reduction Act [IRA]), curtailing market power (again, as the IRA did
with pharmaceuticals, and with other efforts being pursued by the Federal Trade Commission),
and increasing the production of goods currently in short supply (as the recently passed CHIPS
and Science Act does).100 To the extent that there is a real labor shortage, the provision of child-
care and other measures discussed earlier in this paper would increase labor force participation
and the supply of labor.101
There are many other ways in which fiscal and other policies might help combat today’s infla-
tion. It is conceivable that significant increases in the supply of renewable energy or fertilizer, for
example, could be achieved in a relatively short time span were the Defense Production Act (DPA)

97 It should be clear that the concern is not aggregate fiscal spending but specific expenditures (and other regulatory
measures). If one were worried that the economy was already nearing or exceeding its potential output, increased
expenditures addressing supply constraints might (at least in the short run) lead to demand-pull inflation; if so, these
increased expenditures would have to be accompanied either by increased taxes or reduced expenditures elsewhere.
98 Inflation in Europe has been particularly affected by electricity prices. A better regulatory regime would have
dampened these price increases.
99 Earlier, we discussed the fact that firms do not adequately consider the large, pervasive macroeconomic exter-
nalities associated with their decisions. These may be particularly strong in a period of large supply interruptions, such
as this one.
100 There are a variety of policies that might increase housing supply in markets in which rents are rising rapidly.
101 Other measures, such as more immigration, would also help.
34 J.E. Stiglitz and I. Regmi

invoked.102 (The argument for doing so parallels that for government intervention to increase the

Downloaded from https://academic.oup.com/icc/advance-article/doi/10.1093/icc/dtad009/7071722 by National Science & Technology Library user on 09 March 2023
production of vaccines and other COVID-19 products in the early days of the pandemic, when
the market exhibited shortages of critical products and the DPA was invoked.) And even more
so if such measures were accompanied by other ingredients of successful industrial policies, such
as low-interest loans and price guarantees.
When price increases are related to the exercise of market power, tax policy may be an impor-
tant tool in curbing inflation because it is more targeted than the blunt instruments of monetary
policy. As the Independent Commission for the Reform of International Corporate Taxation
(ICRICT) has urged, well-designed corporate tax structures that penalize the exercise of mar-
ket power can provide market-based incentives to limit price increases (ICRICT, 2022).103 Right
now, a temporary windfall profits tax on the super profits reaped by energy companies, at the
expense of ordinary citizens, would raise substantial funds to address the inequities and dis-
tortions arising from today’s inflation and enable investments that would alleviate some of the
supply shortages. It could be designed even to encourage investments that rapidly expand the
supply of energy, particularly in green energy, by not subjecting increments in such expenditures
to the windfall profits tax.
Some of these steps have immediate effects, but others will take longer. Releasing oil from
the oil reserves or food from stockpiles (when they exist) has an immediate effect; changing
agricultural policies from restricting production—as Europe and the United States have been
doing for more than half a century—to expanding production would have some effect within
one growing season and a more significant impact in several growing seasons.

9. Concluding remarks: the need for a measured monetary response

The current political environment, unfortunately, circumscribes the fiscal and other measures
we are likely to take—though the previous discussion notes that some significant measures have
already been adopted.
We are in a predicament similar to the one we faced in 2008, in which the optimal policy
response would have been to implement far stronger fiscal measures. Given the limitations on
fiscal policy, monetary policy had to step in. The increase in inequality was an unintended and
unpleasant side effect, but leaving unemployment high would have been worse. Here, though,
there needs to be a measured monetary response.104
Of the large downside risks discussed in Section 7 associated with raising interest rates too
quickly and too far, which are incommensurate with the limited gains in reducing inflation, the
particular concern is the uncertainty about the length of the lags in monetary policy heightened by
the unprecedented situation of today’s global economy. Indeed, a long-standing criticism of mon-
etary policy is that it operates with long and variable lags—up to a year and a half—giving rise
to the concern that a monetary tightening has its full effect just when it is not needed; monetary
policy is then counterproductive, even with the more normal demand-driven inflation, causing a
recession or a slowdown just when the economy requires stimulation.
Both because of the ineffectiveness of monetary policy when inflation’s origins are largely
sectoral (as now) and because of the long and variable lags in monetary policy, the danger is

102 For example, we noted earlier the shortage of microchips for cars. A strong argument could be made that an
intervention to reallocate chips that were going elsewhere (hypothetically, to smartphones) would be socially beneficial—
the inconvenience of an older smartphone pales in comparison to the benefits of restoring car production to normal
levels more quickly. Because of strong macroeconomic externalities, market responses may be far from socially optimal.
103 Writing down simple models in which, with full observability of relevant variables, one can design taxes with the
desired effects is easier than actually implementing such policies. Still, there are simple, implementable tax policies that
discourage excessive increases in prices. Firms have to report costs and revenues; one can therefore calculate markups
over average costs, and tax authorities have such data for past years. Increasing the windfall profits tax rate on firms with
large windfall profits (for the period of the war in Europe, for instance) disincentivizes price increases and encourages
investment.
104 In the aftermath of the 2008 crisis, monetary authorities, confronting the limits of conventional monetary policy
as short-term interests hit the zero lower bound, were creative in innovating new policies, such as quantitative easing.
Here, too, monetary policy could be creative, for example in directing credit to sectors in which supply shortages are
evident. But while such “directed credit” played an important role in the East Asia miracle, it has been shunned in recent
decades by most monetary authorities.
The causes of and responses to today’s inflation 35

that since inflation will not come down quickly even as central banks raise interest rates, central

Downloaded from https://academic.oup.com/icc/advance-article/doi/10.1093/icc/dtad009/7071722 by National Science & Technology Library user on 09 March 2023
bankers—wedded to the wrong economic model—will push too much. This is like medieval
bloodletters who kept doing more of the same when their therapy failed until the patient either
had a miraculous recovery (for which the bloodletters took credit) or died (which was more
likely). Here, the risk is that, given the uncertainties about the magnitude of the effects of interest
rates on inflation and given the long and variable lags with which the effects of monetary policy
are felt, the ramifications of tightening will be realized just as the economy needs additional
stimulus.

9.1. The challenges of policy

Given the unexpected shocks of a more persistent COVID-19 with various mutations and the war
in Ukraine, and given the startling (at least to strong-market advocates), deep lack of resiliency of
the economy, it should not be a surprise that inflation has been less transitory than had originally
been hoped.
We should be careful about interpreting successes and failures, both in prediction and in policy.
Being correct in one’s forecast for the wrong reason should earn no kudos.105 Understanding
where one’s forecast went wrong is essential for designing appropriate policies.
Those who thought the bout of inflation was transitory were obviously wrong. But the reason,
as this paper has shown, has little to do with the explanations given by most of the inflation
hawks: the underlying problem is not the persistence of excessive aggregate demand, as we have
seen.
Nor does the fact that inflation proved to be so persistent mean that the focus on supply-side
effects was wrong. This paper has shown that a closer look at the data reveals overwhelmingly
that today’s inflation is related to sectoral perturbations and not to an excess of aggregate demand.
Weber et al. (2022) approach the problem from the other side, focusing on the extent to which
today’s inflation can be explained by movements in particular sectoral prices. Their conclusions
are much in accord with ours: they find that, “[I]n times of overlapping emergencies, economic
stabilization needs to go beyond monetary policy and requires institutions and policies that can
target these systemically significant sectors” (Weber et al., 2022).
Those who thought that inflation would be more transitory than proved to be the case were
simply excessively optimistic—they had more faith in the resilience of the market economy than
they should have had. 40 years of ideology grounded in a belief in the strength of the market
economy cannot be shaken overnight.
Moreover, we have seen that the persistence of inflation has much to do with factors that no
one could have reasonably predicted. No one can be blamed for not guessing how long COVID-
19 would linger, with its new, more contagious variants; or the persistence of the flawed Chinese
response, with all of its implications for global supply; or the long-lasting consequences of Rus-
sia’s invasion of Ukraine (the invasion itself, the effectiveness of Ukraine’s response, and the
persistence of Russia); or OPEC’s decisions to restrict the supply of oil. What is clear, though,
is that these unpredictable events have had large and persistent sectoral effects, contributing to
inflation.
If inflation does fall, it is essential not to give credit where credit is not due. We noted earlier
that forces are at play to alleviate many of the sectoral inflationary pressures caused by the war
and pandemic. As the increase in energy and food prices tempers and as bottlenecks get resolved,
inflation should come down on its own.106 Indeed, we have described forces actually lowering
some of the prices that gave rise to inflation, setting off a disinflationary process. If inflation is
tamed as a result, we cannot attribute success in fighting inflation to the resolve of the Fed.
It is equally important to assess blame where blame is deserved: excessive tightening of mon-
etary policy can and likely will induce a recession. A recession is not the inevitable aftermath of
the pandemic or the war. If it occurs, it is mainly of the Fed’s making.

105 In particular, contrary to the prognostications of some, the US exchange rate has not collapsed (which would
have given rise to higher prices of traded goods)—the US exchange rate has strengthened.
106 Or at least, that would be the case in the absence of a wage–price spiral—which does not seem in evidence, as
we noted in Section 4—or in the absence of another supply shock.
36 J.E. Stiglitz and I. Regmi

9.2. Why widely relied upon macroeconomic tools may be misleading in a time

Downloaded from https://academic.oup.com/icc/advance-article/doi/10.1093/icc/dtad009/7071722 by National Science & Technology Library user on 09 March 2023
of turbulence
Some public policy discussions of the inflationary prospects of the economy rely on a well-
studied relationship between inflation and unemployment, called the Phillips curve. In recent
years, the curve has been flat (Hazell et al., 2022), implying that a lower-than-normal (or what
is called the natural) rate of inflation generates little extra inflation; the converse is that it
would take higher unemployment, maintained for a long time, to wring inflation out of the
economy.107
The disinflationary effect of a resolution of the supply-side problems, which we have empha-
sized, would suggest otherwise: that even with a decrease in unemployment, inflation may come
down markedly. Recent changes in labor market dynamics noted earlier are consistent with this
interpretation of the data.
Current inflation, marked by large changes in relative prices, has highlighted the limitations of
modern macroeconomics, which has focused excessively on aggregates rather than the sectoral
constituents of those aggregates. When there are large changes in relative prices, we need to look
at the determinants of sector-specific price changes rather than generalized movements in price
indices such as the PCE and CPI (Borio et al., 2021).
This helps us understand why the Phillips curve has proved to be so unstable. Over the
years, multiple studies have attempted to explain this seemingly ever-shifting Phillips curve—
for instance, changes in demography and in labor markets. The fact remains that, even with such
“adjustments,” it has not proved to be a reliable tool for predicting the course of inflation and
is likely to be even less reliable in the current situation, one unlike any the economy has ever
experienced.108,109
We suspect that the elusiveness of the Phillips curve can best be understood through the disap-
pearance of cyclical properties of specific important components of the inflation index. It should
be evident that prices set in the international market are not indicative of domestic business cycles
(Stock and Watson, 2019) in a world in which cyclical movements are not perfectly synchronous.
Moreover, cyclical properties of sectoral prices, even in non-traded sectors, vary considerably
across markets depending on the market structure, wage-setting practices, and other regulations.
There is no presumption that the aggregate of these would exhibit sufficient stability to be relied
on—especially in a time of unprecedented change like this, including in the economy’s sectoral
composition.
Past experiences provide an uncertain guide to how things will play out today. Indeed, the last
time the United States had a supply shock, albeit one quite different from today’s, was almost
50 years before the era of globalization, when unions and labor legislation were far stronger than
they are today and before we had begun the transition to the service, digital, and knowledge-based
economy.110
In short, it is misguided to base high-stakes economic policy on a relationship that is weak
and unstable, does not match data since the 1970s (Storm and Naastepad, 2012; Sahm, 2021),
and is unlikely to describe the current world well (Storm, 2022).111

107 There is an obvious dissonance as those who argue that today’s inflation is caused by an excess of aggregate
demand also argue that the flat Phillips curve means it will be hard to wring out today’s inflation. If it were flat, the
slight lowering of the unemployment rate from what it otherwise would have been would not have induced much
inflation (though the high levels of unemployment during the pandemic should themselves have induced measurable
disinflation). The two views are, of course, reconcilable if one believes the Phillips curve relationship is unstable. As we
explained, we do, but in ways that make bringing down today’s inflation easier.
108 While the higher level of unemployment during the period after the Great Recession did not have the adverse
effects on inflation that one would have expected—had one used Phillips curves estimated on earlier data—neither did
the lower level of unemployment in the late 1990s have the positive effects on inflation that one would have expected.
109 Adams et al. (2022) show that the estimated Phillips curve relationship even changes when one changes how
one measures rent.
110 As Orszag et al. (2021) point out, economists have been notoriously poor in predicting economic variables, like
interest rates, even in more normal times.
111 And as we note elsewhere, if one does use the curve, one has to explicitly take into account the uncertainty about
its level and shape. One should not base policy just on the expected value of key parameters.
The causes of and responses to today’s inflation 37

9.3. Toward a judicious monetary policy in a world of uncertainty

Downloaded from https://academic.oup.com/icc/advance-article/doi/10.1093/icc/dtad009/7071722 by National Science & Technology Library user on 09 March 2023
All policy is conducted in the presence of high levels of uncertainty. This is true even in regular
times, but the current period is far from ordinary. All policy is, or should be, based on a balanced
assessment of the risks of different actions and the multiplicity of costs and benefits borne by
various segments of society. And policies should not be driven by conventional wisdom or models
fitted to past data with markedly different circumstances.
Raising interest rates from their low levels of the past 14 years is likely good. Zero is not
the scarcity value of capital. Moreover, such low interest rates distort capital markets,112 induce
innovation to save labor,113 and enhance wealth inequality.114 Indeed, tight labor markets not
only lead to higher wages—alleviating inequality, one of the pressing problems of our times—and
the inclusion of marginalized groups but also induce productivity-enhancing innovations.115 But
beyond that point, as we have noted, further increases may be counterproductive and impose a
high cost on our economy and our society.
This is not the occasion to assess more broadly the appropriate framework of monetary policy
or any quantitative targets. Suffice it to say it may be desirable, even necessary, that the 2% target
for inflation be at least temporarily revised. We need to remember that that number was pulled
out of thin air with little or no theoretical or empirical justification.116
Elsewhere, it has been shown that under plausible assumptions, uncertainty about the value
of the natural rate of unemployment or the NAIRU (and there is obviously uncertainty about it)
should lead to targeting an unemployment rate that is below the expected value of the NAIRU—
that is, uncertainty should induce a more expansive monetary policy than would otherwise be
the case.117
This paper has argued that the overwhelming sources of today’s inflation are on the supply
side, and appropriate responses need to consider this reality. In these circumstances, short of
causing a major downturn, monetary policy is unlikely, on its own, to moderate inflation signif-
icantly. It is simply too blunt an instrument. At best, raising interest rates dampens inflationary
pressures by killing the economy—it is evident that if we increase unemployment enough, infla-
tionary pressures in the non-traded sector will be brought in tow. But even then, the economy
may confront inflationary pressures from abroad. Once one takes the kind of sectoral approach in
analyzing the US economy, were the current sources of inflationary pressures to continue, bring-
ing aggregate inflation down would require massive deflation in the non-traded sector.118 This
translates into very high unemployment, particularly costly for low-income and marginalized
communities.

112 With, for instance, risk premium becoming unreasonably small, in the process of investors “searching for yield.”
113 In the theory of induced (or directed) innovation, the extent of labor-saving (vs. capital- or resource-saving)
innovation depends on relative factor prices; low interest rates (costs of capital) induce more labor-saving innovation. See
Stiglitz and Greenwald (2014). On the other hand, the “shadow price” of labor may, in tight labor markets, considerably
exceed market wages, inducing more productivity-enhancing innovations.
114 For a survey of these wealth effects, see Colciago et al. (2019). For a theoretical discussion, see Stiglitz (2015)
and Stiglitz (2016).
115 And so higher wages need not simply lead to a wage–price spiral.
116 See, for instance, Stiglitz and Daugherty (2020). Indeed, especially with downward nominal rigidities, there is a
high cost to having too low an inflation target, especially in periods in which there is large structural adjustment since it
inhibits the ability to adjust relative wages and prices (see Akerlof and Dickens, 2007). Guerrieri et al. (2021) go further,
explaining that, “In fact, there is no simple, possibly re-weighted, inflation index that can be used as the optimal target.
When labor is mobile between sectors, monetary easing can have the additional benefit of inducing faster reallocation,
by producing wage increases in the expanding sector.” As the discussion of Section 4 made clear, the nature of the
trade-offs, say between unemployment and inflation, is at best contentious, with more recent research suggesting that
the costs of tighter labor markets in terms of inflation are lower than had previously been thought to be the case, and
that the benefits in terms of inclusion and induced labor productivity may be greater; if so, policy should be directed at
creating tighter labor markets.
117 Stiglitz (forthcoming) shows that, “If the expectations-augmented Phillips curve is sufficiently close to linear, for
sufficiently small 𝛿 (high discount rates) and [ratio of the marginal social cost of inflation to that of unemployment] it
is desirable to target an unemployment rate … below the NAIRU … if we are much more concerned with shortfalls
in unemployment than we are with overemployment, the argument for having an even higher target (i.e., with a lower
level of unemployment) is strengthened.” The relatively flat Phillips curve implies that the risk of significant increases
in inflation from too low an unemployment rate are limited, while we have explained how higher unemployment may
have a high marginal social cost especially because of its adverse effects on marginalized groups.
118 Especially difficult given how traded-goods prices seep into those in the non-traded sector, as we have seen.
38 J.E. Stiglitz and I. Regmi

Whatever we do, inflation may or may not last longer than we hope. There are scenarios all

Downloaded from https://academic.oup.com/icc/advance-article/doi/10.1093/icc/dtad009/7071722 by National Science & Technology Library user on 09 March 2023
around. The war in Ukraine could end quickly, bringing down the energy and food prices that
have surged with it. The chip shortage is already on the way to being resolved. More favorable
politics might lead to policies that strengthen the labor force. But things may not turn out so
well. Policy should be directed at handling all contingencies, addressing supply shortages as they
appear and protecting the most vulnerable from the effects of inflation that may be beyond our
control.119
Not only do the policy solutions we describe in this paper do much to address the inflation
we are confronting, they also deliver significant benefits to society should inflation be tamed
on its own. If inflation comes down, more likely than not, it is because of the resolution over
time of some of the supply-side problems. Inducing a potentially unnecessary, large economic
downturn and accompanying increase in unemployment is not what the country needs. It only
adds to the suffering of people who are already struggling. Together, these concerns strengthen
the argument for a measured monetary response to inflation—combined with fiscal policy and
other more targeted measures.
The good news is that all the recent indicators point to inflation moderating on its own. There
is now increasing evidence that supply-side problems are at last being resolved. Key prices like
energy and food show strong mean reversion—they are returning to more normal levels—and
that will be disinflationary.120 Hopefully, this will induce the Fed to exercise even more caution
in its policy of monetary tightening.

Acknowledgments
We would like to thank Mike Konczal for his invaluable inputs as well as his comments and sup-
port throughout the writing of this paper. We would like to thank Dean Baker, James Galbraith,
Martin Guzmán, Anton Korinek, Justin Bloesch, J.W. Mason, Andreas Schaab, and Allen Sinai
for their extremely helpful comments. We also would like to thank Claudia Sahm and Matthew
Klein for sharing their thoughts on their areas of expertise. In addition, we are extremely thankful
to Andrea Gurwitt for her incredible edits that have vastly aided the way the paper reads. We
would like to thank Victoria Mooers, Parijat Lal, Ricardo Pommer Muñoz, and Haaris Mateen
for their invaluable contributions to this paper. We also would like to thank Felicia Wong, Marissa
Guananja, Suzanne Kahn, Matt Hughes, Sonya Gurwitt, and Sunny Malhotra of the Roosevelt
Institute and Ali Ryan-Mosley for their support.

References
Adams, B., L. Loewenstein, H. Montag and R. Verbrugge (2022), ‘Disentangling rent index differences: data,
methods, and scope,’ Working Paper no. 555. BLS Working Paper, Washington, DC: US Department of
Labor, US Bureau of Labor Statistics, and Office of Prices and Living Conditions. https://www.bls.gov/osmr/
research-papers/2022/pdf/ec220100.pdf.
Akerlof, G. A. and W. T. Dickens (2007), ‘Unfinished business in the macroeconomics of low inflation: a tribute
to George and Bill by Bill and George,’ Brookings Papers on Economic Activity, 2007(2), 31–46.
Aladangady, A., D. Cho, L. Feiveson and E. Pinto (2022), ‘Excess savings during the COVID-19 pandemic,’
FEDS Notes. https://www.federalreserve.gov/econres/notes/feds-notes/excess-savings-during-the-covid-19-
pandemic-20221021.html.
Aldrick, P. (2022), ‘Larry Summers says US needs 5% jobless rate for 5 years to ease inflation,’ Bloomberg, 20
June 2022, Sec. Economics. https://www.bloomberg.com/news/articles/2022-06-20/summers-says-us-needs-
5-jobless-rate-for-five-years-to-ease-cpi.

119 This paper focuses on the issue of inflation. There are also important policy issues when it comes to protecting
low- and middle-income individuals and small businesses. For instance, Europe has attempted to limit gas and elec-
tricity price increases; more fundamental reforms in its regulatory regime would almost surely be desirable. Inflation
compensation payments, financed partly by a windfall profits tax, can be an essential part of a package of protective
measures.
120 Of course, even if we can have some confidence that relative energy and food prices will be lower than they are
today in the long run, we cannot be sure about prices in the short run. As we have repeatedly noted, no one knows how
long the war in Ukraine will last; how devastating it will be; how quick, strong, and effective supply-side policies in the
United States and Europe will be; or how effective the OPEC will be in reducing the supply of oil and gas.
The causes of and responses to today’s inflation 39

Arnon, A., R. Prisinzano and M. Paulson (2022), ‘Why Taxpayers Owed $500 Billion in Taxes When They Filed

Downloaded from https://academic.oup.com/icc/advance-article/doi/10.1093/icc/dtad009/7071722 by National Science & Technology Library user on 09 March 2023
This Year,’ University of Pennsylvania. 23 May, 2022. Budget Model. https://budgetmodel.wharton.upenn.
edu/issues/2022/5/23/why-taxpayers-owed-500-billion-taxes.
Ashenfelter, O., D. Card, H. Farber and M. R. Ransom (2022), ‘Monopsony in the labor market: new empirical
results and new public policies,’ Journal of Human Resources, 57, S1–S10.
Autor, D., A. Dube and M. Anne (2022), ‘The unexpected compression competition at work in the low wage
economy,’ Presented at HKS Inequality Social Policy Seminar, 12 September, 2022.
Baker, D. (2022a), ‘If Wage Growth Is Driving Inflation, Why Is Workers’ Share of Income Falling?,’ Center for
Economic and Policy Research. 13 April, https://cepr.net/if-wage-growth-is-driving-inflation-why-is-workers-
share-of-income-falling/.
Baker, D. (2022b), ‘Two Routes to Lower Inflation,’ Center for Economic and Policy Research (blog). 26 April,
2022. https://cepr.net/two-routes-to-lower-inflation/.
Baker, D. (2022c), ‘Contrary to What You Read in the Paper, People Are Not Spending Down Their Savings,’
Center for Economic and Policy Research (blog). 1 July, 2022. https://www.cepr.net/contrary-to-what-you-
read-in-the-paper-people-are-not-spending-down-their-savings/.
Bassier, I., A. Dube and S. Naidu (2022), ‘Monopsony in movers: the elasticity of labor supply to firm wage
policies,’ Journal of Human Resources, 57(S), S50–86.
Blanchard, O., A. Domash and L. H. Summers (2022), ‘Bad news for the fed from the Beveridge space,’ Peterson
Institute for International Economics Policy Brief 22-7.
Bloesch, J. (2022a), ‘A New Framework for Targeting Inflation: Aiming for a Range of 2 to 3.5 Percent,’
Roosevelt Institute, 17 November, 2022. https://rooseveltinstitute.org/publications/a-new-framework-for-
targeting-inflation-aiming-for-a-range-of-2-to-3-5-percent/.
Bloesch, J. (2022b), ‘Why Unemployment Can Stay Low While We Fight Inflation,’ Roosevelt Institute (blog). 21
October, 2022. https://rooseveltinstitute.org/2022/10/21/why-unemployment-can-stay-low-while-we-fight-
inflation/.
Board of Governors of the Federal Reserve System (US). (2022), ‘Capacity Utilization: Total Index,’ FRED,
Federal Reserve Bank of St. Louis. accessed December 1, 2022 https://fred.stlouisfed.org/series/TCU.
Borio, C., P. Disyatat, D. Xia and Z. Egon (2021), ‘Monetary Policy, Relative Prices and Inflation Control:
Flexibility Born out of Success,’ BIS Quarterly Review. https://www.bis.org/publ/qtrpdf/r_qt2109b.pdf.
Bureau of Economic Analysis. (2022a), ‘Auto Inventory/Sales Ratio,’ FRED, Federal Reserve Bank of St. Louis.
accessed 30 November, 2022. https://fred.stlouisfed.org/series/AISRSA.
Bureau of Economic Analysis. (2022b), ‘Gross Domestic Product: Terms of Trade Index [W369RG3Q066SBEA],’
Retrieved from FRED, Federal Reserve Bank of St. Louis. accessed November 30, 2022. https://fred.stlouisfed.
org/series/W369RG3Q066SBEA.
Bureau of Labor Statistics (BLS). (2022a), ‘Consumer Expenditure–2021,’ US Bureau of Labor Statistics. accessed
30 November, 2022. https://www.bls.gov/news.release/cesan.nr0.htm.
Bureau of Labor Statistics (BLS). (2022a), ‘Current Employment Statistics–CES (National),’ US Bureau of Labor
Statistics. accessed November 22, 2022. https://www.bls.gov/ces/.
Bureau of Labor Statistics (BLS). (2022b), ‘Archived Consumer Price Index Supplemental Files,’ US Bureau of
Labor Statistics. accessed November 18, 2022. https://www.bls.gov/cpi/tables/supplemental-files/home.htm.
Bureau of Labor Statistics (BLS). (2022b), ‘Labor Force Statistics from the Current Population Survey,’ US Bureau
of Labor Statistics. accessed 22 November, 2022. https://www.bls.gov/cps/tables.htm.
Bureau of Labor Statistics (BLS). (2022c) ‘Earnings,’ US Bureau of Labor Statistics. accessed 22 November, 2022.
https://www.bls.gov/cps/earnings.htm.
Bureau of Labor Statistics (BLS). (2022c), ‘Import/Export Price Indexes,’ US Bureau of Labor Statistics. accessed
22 November, 2022. https://www.bls.gov/mxp/.
Bureau of Labor Statistics (BLS). (2022d), ‘Measuring Price Change in the CPI: Used Cars and Trucks,’ US
Bureau of Labor Statistics. accessed 30 November, 2022. https://www.bls.gov/cpi/factsheets/used-cars-and-
trucks.htm.
Bureau of Labor Statistics (BLS). (2022e), ‘PPI Tables,’ US Bureau of Labor Statistics. accessed 22 November,
2022. https://www.bls.gov/ppi/tables/.
Bureau of Labor Statistics (BLS). (2022f), ‘Employment Situation News Release,’ US Bureau of Labor Statistics.
accessed 30 November, 2022. https://www.bls.gov/news.release/archives/empsit_11042022.htm.
Bureau of Labor Statistics (BLS). (2022g), ‘Relative Importance and Weight Information for the Consumer Price
Indexes,’ US Bureau of Labor Statistics. accessed 30 November, 2022. https://www.bls.gov/cpi/tables/relative-
importance/home.htm.
Bureau of Labor Statistics (BLS). (2022h), ‘Labor Force Participation Rate–With No Disability, 65 Years and
Over,’ Retrieved from FRED, Federal Reserve Bank of St. Louis. accessed 30 November, 2022. https://fred.
stlouisfed.org/series/LNU01375379.
40 J.E. Stiglitz and I. Regmi

Bureau of Labor Statistics (BLS). (2022i), ‘Nonfarm Business Sector: Labor Productivity (Output per Hour) for

Downloaded from https://academic.oup.com/icc/advance-article/doi/10.1093/icc/dtad009/7071722 by National Science & Technology Library user on 09 March 2023
All Employed Persons,’ Retrieved from FRED, Federal Reserve Bank of St. Louis. accessed 19 November,
2022. https://fred.stlouisfed.org/series/OPHNFB.
Bureau of Labor Statistics (BLS). (2022j), ‘Calendar Year Aggregate Expenditure Shares Across Selected Groups
Tables by Demographic Characteristics,’ US Bureau of Labor Statistics. accessed 18 November, 2022. https://
www.bls.gov/cex/tables/calendar-year/aggregate-group-share.htm.
Canepa, F. and H. Schneider (2022), ‘Central Banks Raise Rates Again as Fed Drives Global Inflation Fight,’
Reuters, 22 September, 2022, Sec. European Markets. https://www.reuters.com/markets/europe/central-
banks-raise-rates-again-fed-drives-global-inflation-fight-2022-09-22/.
Cheremukhin, A. and P. Restrepo-Echavarria 2022. ‘The dual Beveridge curve,’ Working Paper no. 2022-021A,
Working Paper Series. St. Louis, MO: Federal Reserve Bank of St. Louis.
Chua, C., M. Danyluk, D. Cowen and L. Khalili (2018), ‘Introduction: turbulent circulation: building a critical
engagement with logistics,’ Environment and Planning D: Society & Space, 36(4), 617–629.
Colciago, A., A. Samarina and D. H. Jakob (2019), ‘Central Bank policies and income and wealth inequality: a
survey,’ Journal of Economic Surveys, 33(4), 1199–1231.
Colgate.Palmolive. (2022), ‘Colgate Announces 3rd Quarter 2022 Results | Colgate-Palmolive Company,’
SA Transcripts. https://investor.colgatepalmolive.com/news-releases/news-release-details/colgate-announces-
3rd-quarter-2022-results.
Congressional Budget Office. (2020), The Budget and Economic Outlook: 2020 to 2030. Congressional Budget
Office Nonpartisan Analysis for the US Congress: Washington, DC.
Congressional Budget Office. (2022a), ‘An Update to the Budget and Economic Outlook: 2021 to 2031,’ Con-
gressional Budget Office Nonpartisan Analysis for the US Congress: Washington, DC, 1 July, 2021. https://
www.cbo.gov/publication/57339.
Congressional Budget Office. (2022b), ‘The Budget and Economic Outlook: 2022 to 2032’, Washington, DC:
Congressional Budget Office Nonpartisan Analysis for the US Congress. https://www.cbo.gov/publication/
57950.
Dayen, D. and R. Mabud (2022), ‘How We Broke the Supply Chain,’ The American Prospect, 31 January, 2022,
Sec. Economic Policy. https://prospect.org/api/content/c278c3a0-8065-11ec-aadd-12f1225286c6/.
Dey, M., H. Frazis, M. Loewenstein and H. Sun (2020). ‘Ability to Work from Home: Evidence from Two
Surveys and Implications for the Labor Market in the COVID-19 Pandemic: Monthly Labor,’ Review: U.S.
June. https://www.bls.gov/opub/mlr/2020/article/ability-to-work-from-home.htm.
Dias, D. A. and J. B. Duarte (2019), ‘Monetary policy, housing rents and inflation dynamics,’ International
Finance Discussion Papers. https://www.federalreserve.gov/econres/ifdp/files/ifdp1248.pdf.
Domash, A. and L. H. Summers (2022a), ‘A labor market view on the risks of a U.S. Hard landing,’ Working
Paper no. 29910. NBER Working Paper Series. Cambridge MA: National Bureau of Economic Research.
Domash, A. and L. H. Summers (2022b), ‘How tight are U.S. labor markets?,’ Working Paper no. 29739. NBER
Working Paper Series. Cambridge MA: National Bureau of Economic Research.
Duran-Franch, J. and I. Regmi (2022), ‘Family-Friendly Policies and the Motherhood Employment Gap during
the COVID-19 Recovery,’ Roosevelt Institute, 16 August, 2022. https://rooseveltinstitute.org/publications/
family-friendly-policies-and-the-motherhood-employment-gap-during-the-covid-19-recovery/.
Dynan, K. E., D. W. Elmendorf and D. E. Sichel (2005), ‘Can financial innovation help to explain the reduced
volatility of economic activity?,’ Journal of Monetary Economics, 53(1), 123–150.
European Central Bank (2020), ‘Selected Euro Area Statistics and National Breakdowns,’ European Central
Bank. 26 October, 2020. https://www.ecb.europa.eu/stats/ecb_statistics/escb/html/index.en.html.
Federal Reserve Bank of Cleveland. (2022), ‘10-Year Expected Inflation’, FRED, Federal Reserve Bank of St.
Louis. accessed 19 November, 2022. https://fred.stlouisfed.org/series/EXPINF10YR.
Federal Reserve Bank of New York. (2022),‘Global Supply Chain Pressure Index (GSCPI),’ Federal Reserve Bank
of New York. accessed 27 November, 2022. https://www.newyorkfed.org/research/policy/gscpi#/overview.
Federal Reserve Bank of St. Louis. (2022a), ‘University of Michigan: Inflation Expectation,’ FRED Database,
Federal Reserve Bank of St. Louis. accessed 27 November, 2022. https://fred.stlouisfed.org/series/MICH.
Federal Reserve Bank of St. Louis. (2022b), ‘10-Year Breakeven Inflation Rate,’ FRED Database, Federal Reserve
Bank of St. Louis. accessed 26 November, 2022. https://fred.stlouisfed.org/series/T10YIE.
Fitch, A. (2022), ‘For Chip Makers, the Flip From Shortage to Glut Intensifies,’ The Wall Street Jour-
nal, 4 November, 2022. https://www.wsj.com/articles/chip-makers-cut-costs-as-demand-slump-supplants-
pandemics-chip-shortage-11667560050.
Freightos Data. (2022), ‘Freightos Baltic Index (FBX): Global Container Freight Index,’ Freightos. accessed 1
December, 2022. https://fbx.freightos.com/.
Friedman, M. (1968), ‘The role of monetary policy,’ American Economic Review, 58(1), 1–17.
The causes of and responses to today’s inflation 41

Ghosh, J. (2022), ‘Curbing Commodity-Market Speculation,’ Project Syndicate, 10 August, 2022, Sec. Eco-

Downloaded from https://academic.oup.com/icc/advance-article/doi/10.1093/icc/dtad009/7071722 by National Science & Technology Library user on 09 March 2023
nomics. https://www.project-syndicate.org/commentary/financial-traders-commodity-market-speculation-
by-jayati-ghosh-2022-08.
Greenwald, B. C. and J. E. Stiglitz (2003), ‘6 macroeconomic fluctuations in an economy of phelps-winter mar-
kets,’ in P. Aghion, R. Frydman, J. Stiglitz and M. Woodford (eds), Knowledge, Information, and Expectations
in Modern Macroeconomics: In Honor of Edmund S. Phelps. Princeton University Press: Princeton, NJ, pp.
123–136.
Greenwald, B. C., J. E. Stiglitz, R. E. Hall and S. Fischer (1988), ‘Examining alternative macroeconomic theories,’
Brookings Papers on Economic Activity, 19(1), 207–270.
Greig, F. and E. Deadman (2022), ‘Household pulse: the state of cash balances through March 2022,’ JPMorgan
Chase & Co, June 2022. https://www.jpmorganchase.com/institute/research/household-income-spending/
household-pulse-cash-balances-through-march-2022.
Groundwork Collaborative. (2022), Q2 2022 Corporate Profiteering Findings. Washington, DC: Ground-
work Collaborative. https://groundworkcollaborative.org/resource/q2-2022-oil-gas-corporate-profiteering-
findings/.
Guerrieri, V., G. Lorenzoni, L. Straub and I. Werning (2021), ‘Monetary policy in times of structural reallocation,’
Working Paper no. 2021-111 Becker Friedman Institute (BFI) Working Papers. Chicago, IL: BFR Economics
at University of Chicago. https://bfi.uchicago.edu/wp-content/uploads/2021/09/BFI_WP_2021-111.pdf.
Gutiérrez, G. and T. Philippon (2019), ‘How EU Markets Became More Competitive Than US Markets: A Study
of Institutional Drift,’ University of Pennsylvania, Wharton Finance Department. http://germangutierrezg.
com/GutierrezPhilippon_Europe_2019.pdf.
Hazell, J., J. Herreño, E. Nakamura and J. Steinsson (2022), ‘The slope of the Phillips curve: evidence from U.S.
States,’ The Quarterly Journal of Economics, 137(3), 1299–1344.
Hebebrand, C. and D. Laborde. (2022), ‘High fertilizer prices contribute to rising global food security concerns,’
International Food Policy Research Institute (blog). 25 April, 2022. https://www.ifpri.org/blog/high-fertilizer-
prices-contribute-rising-global-food-security-concerns.
Holder, M., J. Jones and T. Masterson (2021), ‘The early impact of COVID-19 on job losses among Black women
in the United States,’ Feminist Economics, 27(1-2, 103–116.
Hoynes, H., D. L. Miller and J. Schaller (2012), ‘Who suffers during recessions?,’ Journal of Economic
Perspectives, 26(3), 27–48.
IMF Fiscal Affairs Department. (2021), ‘Fiscal monitor database of country fiscal measures in response to
the COVID-19 pandemic,’ From Database of Country Fiscal Measures in Response to the COVID-19
Pandemic and IMF staff estimates. updated September 27, 2021. https://www.imf.org/en/Topics/imf-and-
covid19/Fiscal-Policies-Database-in-Response-to-COVID-19.
Independent Commission for the Reform of International Corporate Taxation (ICRICT). (2022), ‘An Emergency
Tax Plan to Confront the Inflation Crisis,’ ICRICT. https://www.icrict.com/press-release/2022/9/16/icrict-
declaration-an-emergency-tax-plan-to-confront-the-inflation-crisis-m87sa.
International Monetary Fund (IMF). (2019), World Economic Outlook, October 2019: Global Manufacturing
Downturn, Rising Trade Barriers, International Monetary Fund: Washington, DC.https://www.imf.org/en/
Publications/WEO/Issues/2019/10/01/world-economic-outlook-october-2019.
International Monetary Fund (IMF). (2022), ‘Countering the Cost-of-Living Crisis’, Washington, DC: Inter-
national Monetary Fund. https://www.imf.org/en/Publications/WEO/Issues/2022/10/11/world-economic-
outlook-october-2022.
International Transport Forum. (2015), ‘The Impact of Mega-Ships,’ Paris: International Transport Forum,
OECD. https://www.itf-oecd.org/impact-mega-ships.
International Transport Forum. (2018), ‘The Impact of Alliances in Container Shipping’, Paris: International
Transport Forum, OECD. https://www.itf-oecd.org/impact-alliances-container-shipping.
Institute for Supply Management. (2022), ‘December 2022 Manufacturing ISM Report on Business’, accessed
3 December, 2022. https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-
business/pmi/december/.
IPES-Food. (2022), ‘Another Perfect Storm?’, Brussels: IPES-Food. https://ipesfood.org/pages/foodpricecrisis.
Jeanne, O. and A. Korinek (2019), ‘Managing credit booms and busts: a Pigouvian taxation approach,’ Journal
of Monetary Economics, 107, 2–17.
Johnson, N. N. (2017), ‘Tradable and Nontradable Inflation Indexes: Replicating New Zealand’s Tradable
Indexes with BLS CPI Data,’ US Bureau of Labor Statistics Monthly Labor Review, May 2017. https://www.
bls.gov/opub/mlr/2017/article/tradable-and-nontradable-inflation-indexes.htm.
Kammer, A. and N. Arnold (2021), ‘Europe’s COVID-19 crisis response: a race well run, but not yet won,’
Intereconomics, 56(4), 194–196.
Klein, M. C. (2022), ‘Is America’s job market ‘too good’?,’ The Overshoot, August 2022. https://theovershoot.
co/p/is-americas-job-market-too-good.
42 J.E. Stiglitz and I. Regmi

Kmetz, A., J. Mondragon and J. Wieland (2022), ‘Remote Work and Housing Demand’, San Francisco: Federal

Downloaded from https://academic.oup.com/icc/advance-article/doi/10.1093/icc/dtad009/7071722 by National Science & Technology Library user on 09 March 2023
Reserve Bank of San Francisco. https://www.frbsf.org/wp-content/uploads/sites/4/el2022-26.pdf.
Konczal, M. and N. Lusiani (2022), ‘Prices, Profits, and Power: An Analysis of 2021 Firm-Level Markups,’ New
York: Roosevelt Institute. https://rooseveltinstitute.org/wp-content/uploads/2022/06/RI_PricesProfitsPower_
202206.pdf.
Korinek, A. and J. E. Stiglitz (2022), ‘Macroeconomic stabilization for a post-pandemic world: revising the
fiscal-monetary policy mix and correcting macroeconomic externalities,’ Working Paper no. 78. Hutchins
Center Working Paper Series. Washington, DC: Brookings Institution. https://www.brookings.edu/research/
macroeconomic-stabilization-for-a-post-pandemic-world/.
Lazonick, W. and M. Hopkins (2021), ‘Why the CHIPS are down: stock buybacks and subsidies in the U.S.
semiconductor industry,’ Institute for New Economic Thinking Working Paper Series No. 165. https://papers.
ssrn.com/sol3/papers.cfm?abstract_id=3952144.
Lusiani, N. (2022), ‘Power Struggle: How Shareholder Primacy in the Electrical Utility Sector Is Holding Back
an Affordable and Just Energy transition,’ Roosevelt Institute, 24 May, 2022. https://rooseveltinstitute.org/
publications/electric-utilities-shareholder-primacy/.
Mason, J. W., M. Konczal and L. Melodia (2021), ‘Reimagining Full Employment: 28 Million More Jobs
and a More Equal Economy,’ Roosevelt Institute, 21 July, 2021. https://rooseveltinstitute.org/publications/
reimagining-full-employment-28-million-more-jobs-and-a-more-equal-economy/.
Melodia, L. and K. Karlsson (2022), ‘Energy Price Stability: The Peril of Fossil Fuels and the Promise of
Renewables,’ Roosevelt Institute, 11 May, 2022. https://rooseveltinstitute.org/publications/energy-price-
stability/.
Meredith, S. and N. Turak (2022), ‘U.S. delivers angry rebuke of massive OPEC + production cut—and it
could backfire for Saudi Arabia,’ CNBC, 6 October, 2022. https://www.cnbc.com/2022/10/06/oil-us-delivers-
angry-rebuke-of-massive-opec-production-cut.html.
Migration Policy Institute. (2022), ‘Migration Data Hub,’ Migration Policy Institute. accessed 1 December, 2022.
https://www.migrationpolicy.org/programs/migration-data-hub.
Motley Fool Transcribing. (2022), ‘Kimberly Clark (KMB) Q2 2022 Earnings Call Transcript,’ last
updated 26 July, 2022. https://www.fool.com/earnings/call-transcripts/2022/07/26/kimberly-clark-kmb-q2-
2022-earnings-call-transcrip/.
Nick, B. (2022), “Unretirements’ Continue to Rise as More Workers Return to Work,’ Hiring Lab: Economic
Research by Indeed, 14 April, 2022. https://www.hiringlab.org/2022/04/14/unretirements-rise/.
Organisation for Economic Co-operation and Development (OECD). (2022a), ‘Inflation (CPI),’ OECD. accessed
22 November, 2022. http://data.oecd.org/price/inflation-cpi.htm.
Organisation for Economic Co-operation and Development (OECD). (2022b), ‘Inflation forecast,’ OECD.
accessed 30 November, 2022. http://data.oecd.org/price/inflation-forecast.htm.
Organisation for Economic Co-operation and Development (OECD). (2022c), ‘Labour Market Situation,
OECD - Updated: October 2022,’ OECD, 10 October, 2022. https://www.oecd.org/newsroom/labour-
market-situation-oecd-updated-october-2022.htm.
Organisation for Economic Co-operation and Development (OECD). (2022d), ‘Main economic indicators -
complete database,’ Main Economic Indicators (database). accessed 30 November, 2022. https://www.oecd-
ilibrary.org/economics/data/main-economic-indicators/main-economic-indicators-complete-database_data-
00052-en.
Orszag, P. R., R. E. Rubin and J. E. Stiglitz (2022), ‘Fiscal Resiliency in a Deeply Uncertain World: The Role of
Semiautonomous Discretion,’ Industrial and Corporate Change, 31(2), 281–300.
Palladino, L. and I. Estevez (2022), ‘The Need for Corporate Guardrails in US Industrial Policy,’ Roosevelt
Institute, 18 August, 2022. https://rooseveltinstitute.org/publications/the-need-for-corporate-guardrails-in-
us-industrial-policy/.
Parker, K. and J. M. Horowitz (2022), ‘Majority of Workers Who Quit a Job in 2021 Cite Low
Pay, No Opportunities for Advancement, Feeling Disrespected,’ Pew Research Center (blog). 9
March, 2022. https://www.pewresearch.org/fact-tank/2022/03/09/majority-of-workers-who-quit-a-job-in-
2021-cite-low-pay-no-opportunities-for-advancement-feeling-disrespected/.
Phelps, E. S. and S. G. Winter Jr. (1970), ‘Optimal price policy under atomistic competition,’ in Microfoundations
of Employment and Inflation Theory. Vol. 52, 1st edn. W. W. Norton and Co: New York, p. 3+.
Powell, J. (2022a), ‘Transcript of Chair Powell’s Press Conference: November 2, 2022,’ Federal Reserve Board.
https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20221102.pdf.
Powell, J. (2022b), ‘Transcript of Chair Powell’s Press Conference: September 21, 2022,’ Federal Reserve Board.
https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20220921.pdf.
Powell, J. (2022c), ‘Monetary Policy and Price Stability,’ Speech delivered at Reassessing Constraints on the
Economy and Policy economic policy symposium. Jackson Hole, Wyoming. 26 August, 2022. https://www.
federalreserve.gov/newsevents/speech/powell20220826a.htm.
The causes of and responses to today’s inflation 43

Raifman, J. and A. Sojourner (2022). ‘Protecting High-Risk Individuals Means Considering the Economic Cost

Downloaded from https://academic.oup.com/icc/advance-article/doi/10.1093/icc/dtad009/7071722 by National Science & Technology Library user on 09 March 2023
of COVID-19,’ https://rooseveltinstitute.org/2022/06/28/economic-cost-of-covid-19/.
Rossin-Slater, M. (2017), ‘Maternity and family leave policy,’ NBER Working Paper no. 23069. NBER Working
Paper Series. Cambridge MA: National Bureau of Economic Research. https://www.nber.org/system/files/
working_papers/w23069/w23069.pdf.
Rudd, J. B. (2021), ‘Why do we think that inflation expectations matter for inflation? (and should we?),’ Finance
and Economics Discussion Series 2021-062. Board of Governors of the Federal Reserve System.
Russell, R. (2022), Price Wars: How the Commodities Markets Made Our Chaotic World. Knopf Doubleday
Publishing Group: New York City.
Sahay, T. (2022), ‘How high energy prices emboldened Putin,’ The American Prospect, 22 March, 2022, Sec.
Books. https://prospect.org/api/content/9a2e58f4-a957-11ec-9c46-12274efc5439/.
Sahm, C. (2021), ‘COVID-19 is transforming economic policy in the United States,’ Intereconomics, 56(5),
185–190.
Sims, J., C. H. von der Neyen, D. D‘souza, L. Chau, N. González-Jiménez and L. Sani. (2021), ‘Put Gas on
Standby,’ London: Carbon Tracker Initiative. https://carbontracker.org/reports/put-gas-on-standby/.
Solow, R. M. and J. E. Stiglitz (1968), ‘Output, employment and wages in the short run,’ Quarterly Journal of
Economics, 82(4), 537–560.
Stiglitz, J. E. (2006), Making Globalization Work. W. W. Norton & Company: New York.
Stiglitz, J. E. (2015), ‘New theoretical perspectives on the distribution of income and wealth among individuals:
part IV land and credit,’ Working Paper no. 21192. NBER Working Paper Series. No 21192. NBER Work-
ing Paper Series. Cambridge, MA: National Bureau of Economic Research. https://www.nber.org/papers/
w21192.
Stiglitz, J. E. (2016), ‘Fed policy, inequality, and equality of opportunity,’ in A. Brown, D. Buchholz, D. Davis
and A. Gonzalez (eds), Economic Mobility: Research & Ideas on Strengthening Families, Communities &
the Economy. Federal Reserve Bank of St. Louis and the Board of Governors of the Federal Reserve System:
St. Louis, MO, pp. 77–94.
Stiglitz, J. E. (2019), ‘Reflections on the global financial crisis ten years on,’ in S. O’Halloran and T. Groll (eds),
After the Crash: Financial Crises and Regulatory Responses. Columbia University Press: New York, pp.
167–182.
Stiglitz, J. E. (2020), ‘Four Priorities for Pandemic Relief Efforts,’ Roosevelt Institute Working Papers. New
York: Roosevelt Institute. https://rooseveltinstitute.org/wp-content/uploads/2020/07/RI_Four-Priorities-for-
Pandemic-Relief-Effort-WP-202004-1.pdf.
Stiglitz, J. E. (forthcoming), Rethinking Macroeconomics: Volume IV of Selected Papers. Oxford University Press:
Oxford, UK.
Stiglitz, J. E. and D. Baker (2022a), ‘Inflation dos and don’ts,’ Project Syndicate, 8 July, 2022. https://www.
project-syndicate.org/onpoint/us-inflation-supply-side-causes-and-solutions-by-joseph-e-stiglitz-and-dean-
baker-2022-07.
Stiglitz, J. E. and D. Baker (2022b), ‘The Fed should wait and see,’ Project Syndicate, 12 Septem-
ber, 2022, Sec. Economics. https://www.project-syndicate.org/commentary/fed-should-pause-rate-hikes-
inflation-dampening-by-joseph-e-stiglitz-and-dean-baker-2022-09.
Stiglitz, J. E. and C. Daugherty, and the Foundation for European Progressive Studies. (2020), Rewriting the
Rules of the European Economy: An Agenda for Growth and Shared Prosperity. W.W. Norton: New York.
Stiglitz, J. E. and B. Greenwald (2014), Creating A Learning Society: A New Approach to Growth, Development,
and Social Progress. Columbia University Press: New York.
Stiglitz, J. E. and M. M. Guzman (2021), ‘The pandemic economic crisis, precautionary behavior, and mobility
constraints: an application of the dynamic disequilibrium model with randomness,’ Industrial and Corporate
Change, 30(2), 467–497.
Stock, J. H. and M. W. Watson (2019), ‘Slack and cyclically sensitive inflation,’ Working Paper no. 25987.
NBER Working Paper Series. Cambridge, MA: National Bureau of Economic Research. https://www.nber.
org/papers/w25987.
Storm, S. (2022), ‘Inflation in the time of corona and war,’ Institute for New Economic Thinking Working Paper
Series no. 185. Rochester, NY: Institute for New Economic Thinking. https://papers.ssrn.com/sol3/papers.
cfm?abstract_id=4138714.
Storm, S. and C. W. M. Naastepad (2012), Macroeconomics beyond the NAIRU. Harvard University Press:
Cambridge, MA.
Summers, L. H. (2021), ‘The Biden stimulus is admirably ambitious. But it brings some big risks, too,’ Wash-
ington Post, 4 February, 2021, Sec. Opinion. https://www.washingtonpost.com/opinions/2021/02/04/larry-
summers-biden-covid-stimulus/.
44 J.E. Stiglitz and I. Regmi

Swanson, A. (2022), ‘Biden administration releases plan for $50 billion investment in chips,’ New York Times,

Downloaded from https://academic.oup.com/icc/advance-article/doi/10.1093/icc/dtad009/7071722 by National Science & Technology Library user on 09 March 2023
6 September, 2022, Sec. Business. https://www.nytimes.com/2022/09/06/business/economy/biden-tech-chips.
html.
Tully, S. (2022), ‘Contrarian economist Larry Summers was right all along about inflation. His ominous new
prediction for what’s next,’ Fortune, 23 September, 2022, Sec. Economy. https://fortune.com/2022/09/23/
economist-larry-summers-inflation-economy-prediction/.
US Department of Agriculture (USDA). (2022) ‘Food Price Outlook,’ USDA Economic Research Service. last
updated 22 November, 2022. https://www.ers.usda.gov/data-products/food-price-outlook/.
Weber, I. M., J. L. Jauregui, L. Teixeira and L. N. Pires (2022), ‘Inflation in times of overlapping emergencies:
systemically significant prices from an input-output perspective,’ UMass Amherst Economics Department
Working Paper Series. https://scholarworks.umass.edu/econ_workingpaper/340/.
Williams, J. (2020), ‘Laid off more, hired less: Black workers in the COVID-19 recession,’ The Rand Blog
(blog). September 29, 2020. https://www.rand.org/blog/2020/09/laid-off-more-hired-less-black-workers-in-
the-covid.html.
Williams, A. (2022), ‘The Physical Capacity Shortage View of Inflation,’ Washington, DC: Employ America.
https://www.employamerica.org/content/files/2022/06/The-Physical-Capacity-Shortage-View-of-Inflation.
pdf.
World Bank. (2022), ‘Employment to population ratio, 15+, Total (%) (Modeled ILO Estimate),’ From ILOSTAT
database, International Labour Organization. Updated June 2022. https://data.worldbank.org/indicator/SL.
EMP.TOTL.SP.ZS.
Zillow Research. (2022), ‘Housing Data,’ Zillow. last updated October 2022. https://www.zillow.com/research/
data/.

Appendix 1: Analyzing potential output

There are two key ingredients in analyzing potential output: capital stock and labor supply.
Both were affected by the pandemic but not sufficiently to generate a significant disparity
between aggregate demand and potential aggregate supply with the trajectory of some of the
inputs that go into the construction of potential GDP. Capital input measured by the net stock
of fixed assets (nonresidential private) is slightly below pre-pandemic trends in 2021 and into
2022 (Figure A1).
Another indicator that the economy was well below potential is that capacity utilization did
not reach the pre-pandemic level until June 2021, after the initial increases in inflation, and by
October 2022 was just reaching levels attained in 2015, when inflation was very muted.121

Potential labor supply is more complex. Estimates of the number of people of working
age had largely stagnated in the years before the pandemic (Figure A2) and, in spite of
the pandemic and the restrictions on immigration, are now slightly higher than before the
pandemic.
On the other hand, labor force participation is down, and there has been considerable discus-
sion about whether this is temporary or long lasting (as we observed in Sections 2 and 4), and
whether increased hiring with better wages and working conditions would result in higher labor
force participation. The answers to these questions, discussed in Section 4, affect estimates of
potential output, though as we have noted, not enough to alter our analysis.122
Unemployment statistics reflect those people who are able and willing to work—searching
for jobs and not finding them. The fact that the economy had large excess capacity and large
numbers of unemployed workers provides a compelling case that aggregate demand was lower

121 Board of Governors of the Federal Reserve System (2022).

122 The CBO revised its estimates repeatedly over the course of the pandemic. The numbers we use post-pandemic
are based on its latest calculations. The central issue was the effect of the pandemic on labor supply. In the peak of
the pandemic, the CBO thought there would be a sufficient reduction in labor force participation to significantly shift
down potential output. It subsequently adjusted its potential output estimates, saying that the “…CBO projects that
the effects of social distancing on economic activity in 2021 will be smaller than the effects it projected in February,
reflecting a more rapid return to normalcy” (CBO 2022b). Even using the CBO’s more pessimistic estimates of potential
output, one cannot explain observed inflation by looking only at the aggregates: the actual GDP was still under the
potential GDP estimated in July 2021.
The causes of and responses to today’s inflation 45

Figure A2. Working-age population

than potential output. What constrained output was aggregate demand and/or sectoral supply
constraints.

Appendix 2: Explaining the lack of resilience

In our concluding remarks, we explained why many analysts were excessively optimistic that
inflation would be temporary: they thought that the supply shortages would be more temporary
than proved to be the case. The economy exhibited a remarkable lack of resilience. We should
have been more attentive to the failures that became evident during the pandemic itself, for exam-
ple the inability to produce even simple products like masks and protective gear let alone more
complicated products like tests and ventilators.
There were many factors contributing to the lack of resilience. The just-in-time inventory sys-
tem (keeping inventories at a minimum) has distinct advantages in normal times. But with supply
chain interruptions, stock-outs became frequent, which led to production interruptions. More-
over, restarting production when there are multiple stock-outs can be problematic in a world in
46 J.E. Stiglitz and I. Regmi

which the production of each good requires multiple inputs: good A requires more input of good

Downloaded from https://academic.oup.com/icc/advance-article/doi/10.1093/icc/dtad009/7071722 by National Science & Technology Library user on 09 March 2023
B to restart production; but good B requires C; but good C requires more A. Interdependencies
can result in production traps, which may take a long time to work themselves out.123
There was also underinvestment in many parts of the economy, including underinvestment in
resilience. Part of resilience is having the capacity to meet shifts and surges in demand. In striving
to cut costs, firms did everything they could to ensure that they did not have any excess capacity.
Lack of supply chain diversification, as firms pursued the cheapest sources of supply, meant the
economy was more vulnerable to supply-side interruptions, such as might occur with a lockdown
in that source of supply.
Moreover, the increasing market concentration we had been warned about (Gutiérrez and
Philippon, 2019; Stiglitz, 2019), the consequences of which we describe more fully in the fol-
lowing, not only gave firms the power to take advantage of these disruptions by raising prices
and markups but also made the economy less resilient simply because of a lack of adequate
diversification. This became evident in the baby formula shortage.
We could push the analysis back further. Why had the economy developed such a lack of
resilience? The answer is simple: the shortsightedness and poor risk management that became so
clear in the run-up to the 2008 financial crisis marked not only the financial sector but vast swaths
of the economy.124 A simple example illustrates what had happened. We built cars without spare
tires—all well and good as long as a driver did not need one. It saved pennies in the short run,
but these savings were overwhelmed by costs when a driver had a flat tire miles away from the
nearest gas station.125
There is one more reason for the observed market dysfunctions. Companies in the automobile
and smartphone sectors, for instance, failed to take into account the full societal consequences of
their decisions. Shortages of goods in one sector have consequences for others. These are referred
to as macroeconomic externalities; they are pervasive and can have large consequences (Jeanne
and Korinek, 2019).126

Appendix 3: Case studies

There are many examples of critical supply shortages. In this appendix, we describe in greater
detail what happened in three critical cases.
Case study: microchips
We have already described the large role that new and used automobiles plus motor parts
played in overall CPI inflation in 2021. It was not that we had forgotten how to make cars during
the pandemic or that production facilities had suddenly disappeared. Key to the car shortage was
the lack of microchips, and the lack of microchips was because of a simple market failure: by and
large, car manufacturers (except Tesla) had canceled chip orders at the onset of the pandemic, so
production shifted elsewhere (e.g., to making smartphone chips).
There is no definitive explanation for why it took so long to alleviate the chip shortage. Either
repurposing chip production for cars or readapting cars’ software for the kind of chips that might
be available would in any case take time. But longer-term contracts with the new users may also
have impeded the redirection of production. In our market economy, even if the social return to
reducing the supply constraint in automobiles is enormous, especially when compared to asking
households to keep old smartphones for a little longer, such diversions of production may be
limited.127

123 Again, something that Stiglitz (2020) had warned about but was totally missed by those focusing (incorrectly,
as we have seen) on only the macroeconomics.
124 Economists would put it that firms had not adequately priced risk.
125 Similarly, Stiglitz (2022) noted the lack of spare capacity—extra beds—in hospitals, which played out
disastrously in the pandemic.
126 Korinek and Stiglitz (2022) have discussed the implications of these macroeconomic externalities for inflation
more broadly, and Stiglitz and Guzman (2021) have discussed their implications for responding to the pandemic. These
externalities are the macroeconomic manifestation of a broad class of externalities uncovered by Greenwald et al.
(1988).
127 These problems are closely related to the macroeconomic externalities discussed earlier.
The causes of and responses to today’s inflation 47

There was another reason for the chip shortage. Rather than investing in their own fabri-

Downloaded from https://academic.oup.com/icc/advance-article/doi/10.1093/icc/dtad009/7071722 by National Science & Technology Library user on 09 March 2023
cation plants that would have enhanced resiliency, semiconductor firms preferred to outsource
manufacturing to Asia (Williams, 2022). There were short-term benefits, of course: higher short-
term returns and profits. The top five firms in the semiconductor industry also chose to spend
$247 billion in share buybacks between 2011 and 2021 rather than invest in capacity and
innovation.128
Case study: fossil fuels
The disregard of relevant risks is evident too in the excessive reliance on fossil fuels, and the
slow pace of the shift to renewables. A well-diversified renewable energy system, supplemented
with using existing energy generator plants as buffers, would provide a reliable and low-cost
source of energy for the short to intermediate term and would have reduced the impact of the
increase in oil and gas prices as a result of the war in Ukraine.
The risks of renewables are far lower than those of relying on the whims of the authoritarian
countries central to the fossil fuel system. This has been evident for a long time.129 Yet market
producers have been slow to move, and governments have been slow to encourage a faster pace
of transition toward renewables.130
One might have expected a more rapid supply response from those involved in fracking in the
United States and perhaps elsewhere. The lack of response may be a result of large losses from
overexpansion in the previous boom; a price guarantee for a relatively short period (4 years)
might have brought down prices rapidly, with at most limited effects on atmospheric greenhouse
gas concentrations (because such fields can be designed to have a short life).
Case study: shipping
We have seen a similar lack of attention to relevant risks in other industries (Palladino and
Estevez, 2022). Ports worldwide, including in the United States, struggled to match the massive
increase in the pace of the development and use of mega-ships by container shipping companies.
While deploying mega-ships helped container companies to defray labor and fuel costs through
economies of scale, handling costs for the rest of the transport chain, including port authorities
and railroads, increased along with the size of the ships (International Transport Forum, 2015).
Because the container companies were making these decisions at a fast pace and without ade-
quately consulting port authorities, efficiency decreased as port authorities, most of which were
public and quasi-public, struggled to upgrade infrastructure to accommodate these larger vessels
(Chua et al., 2018). In addition, the rise of mega-ships also led to increased market concentration,
limited choices, and poor supply chain resiliency; three alliances of ocean shippers carry 80% of
the world’s cargo (Dayen and Mabud, 2022; International Transport Forum, 2018).

Appendix 4: US and global labor market

The drama of the pandemic in the US labor market
In the United States, some 23 million people joined the ranks of the unemployed at the worst
of the pandemic economic downturn, and the labor market was thrown into turmoil. The con-
trasts in this context between the United States and other countries are marked, as shown by
OECD data. The US unemployment rate peaked at 14.7%, the highest in BLS recorded data
since January 1948. The UK peaked at 5.1%, Germany at 3.9%, and South Korea at 5.2%.131
All these countries had pre-pandemic unemployment rates between 3.3% and 4%. This set the
stage for an unprecedented level of labor movement in the United States and made the challenge
of interpreting what is happening in the United States all the more difficult. The United States

128 These companies included Intel, IBM, Qualcomm, Texas Instruments, and Broadcom (Lazonick 2021). It is
ironic that now the government will inject some $50 billion into the industry because it claims it lacks the financial
wherewithal to make the necessary investments (Swanson, 2022).
129 In Making Globalization Work (Stiglitz, 2006), Stiglitz warned of the risks of Germany becoming excessively
dependent on Russian gas.
130 It has not been for lack of finance: the electric utility sector has distributed over 86% of its net earnings (i.e.,
over $250 billion) to shareholders over the past decade (Lusiani, 2022).
131 The difference is probably mostly accounted for by poor policy design; other countries made a big effort to keep
workers attached to their firms.
48 J.E. Stiglitz and I. Regmi

was distinctive both in the size of its recovery packages and in their design, doing a poorer job
of retaining the bonds between workers and their employers.
The pandemic affected both the demand and supply sides of the labor market. In the aftermath
of the pandemic, the labor supply was lower than that had been expected before the pandemic,
most obviously because 457,000 workers died of COVID-19. Increased risk of death, COVID
complications, long COVID, shutdowns, and business closures and downsizing led to the early
retirements of around 3 million workers (Storm, 2022). Immigration to the United States also
remained below 2019 pre-pandemic levels in 2021 (Migration Policy Institute, 2022),132 both
because the government increased barriers to immigration (from their already high levels) and
because poor COVID-19 management, especially in the early stretch of the pandemic, made the
United States less appealing as a destination.133
The key issue, referred to earlier, is “Did COVID-19 unleash long-term changes in attitudes
toward work, or were the changes temporary and likely to be reversed as the economy slowly
normalized?”134 The recent increase in labor force participation (including retirees returning to
work) suggests that much of what has happened is temporary.135
Monthly data from the BLS show that, by October 2022, the employment-to-population ratio
had recovered from an all-time low of 51.3% in the initial days of the pandemic to 60%, a
number just 1 percentage point below pre-pandemic levels.136
Vacancies and quits
The greatest puzzle of the current labor market has been the increase in quits and vacancy
rates (Figures A3 and A4.)137 Did this point to a permanent change in the labor market, with
attitudes to work reflected in the “Great Resignation”? Were there structural changes, such as

132 Migration Policy Institute tabulations of the US Department of Homeland Security, Office of Immigration Statis-
tics, Yearbook of Immigration Statistics (various years). Available at www.dhs.gov/files/statistics/publications/yearbook.
shtm.
133 While labor shortages contribute to supply constraints, this relationship also works the other way around, where
supply constraints lead to unwillingness to participate in the labor market. See Solow and Stiglitz (1968). The alleviation
of supply shortages may itself have a positive impact on labor supply.
134 Some have suggested too that the income/wealth effects associated with increased wealth and cash balances
(described in Section 2) may have led some to reduce their labor supply. Most of these effects, if significant, will be
temporary too.
135 The number of persons not in the labor force was down in October 2022 from 1 year ago in the latest BLS data
(BLS, 2022f); for retirees, data on labor force participation for age 65 and above from the FRED (BLS, 2022h). The
pattern is also confirmed by Hiring Lab (Nick, 2022).
136 We earlier used World Bank calculations based on ILO data for an international comparison. These data, only
available up to 2021, show that the US employment-to-population ratio had started increasing in 2021 after dropping
sharply in 2020. The BLS data show that the trend had continued, but even then, the employment-to-population and
labor force participation numbers for the United States were markedly lower than that of other advanced countries.
137 Many of the quits in 2020 and 2021 were associated with the rapid rise in risks associated with existing labor
market arrangements (see, e.g., Parker and Horowitz, 2022). Perhaps relatedly, lower income brackets and other
The causes of and responses to today’s inflation 49

increased costs of matching workers with firms, that would indicate a shift in key labor market
functions like the Phillips curve or the Beveridge curve (which relies on job openings for a given
level of unemployment as an indication of tight labor markets)? If so, this would suggest that it
might take high levels of unemployment for long periods of time to tame the labor market and
bring down the rate of wage inflation.
Of course, with so many workers detached from their firms, loyalty to firms was decreased
and there was an unprecedented task of rematching workers with firms, so one would expect
temporarily high labor turnover, high quits, and correspondingly high vacancies. But these effects
might be relatively short-lived—they did not necessarily represent a permanent upward shift in
quits and vacancy rates, as a result of, say, greater difficulties in matching.
Figures A3 and A4 show that both quits and vacancies have come down significantly (for
instance, vacancies have come down from a peak of 6.6% in March 2022 to 5.9% in September)
without any significant increase in the unemployment rate. While the data are only for a limited
time span, they are consistent with the perspective advanced here that the changes in labor market
dynamics may be largely temporary.
Interpreting shifting vacancy and quit rates
Quits and vacancies are, of course, interdependent, and observed quit and vacancy rates
are both endogenous variables, related to a host of variables besides matching costs—including
and especially the special pandemic circumstances with turnover costs, wage distributions, and
unemployment insurance all altered from “normal.” Some economists have suggested that wage
inflation is related to vacancies (Blanchard et al., 2022), but Bloesch (2022b) provides a far more
convincing case that it is related to actual quits138 —it is the threat of a worker leaving, more than
the difficulty in filling a job, at least as measured by standard vacancy data. (Most quits represent
workers moving from one firm to another, and shifts in hiring practices/norms affect job listings
and therefore “vacancies”).139

marginalized groups, including Black and Hispanic workers (Raifman and Sojourner, 2022), disproportionately exposed
to pandemic risks, showed higher quit rates.
138 See also Cheremukhin and Restrepo-Echavarria (2022).
139 This is particularly true because norms of recruitment practices have changed over time, with a greater emphasis
on the equality of opportunity, inclusion, and transparency. Human Resource practices may require specificity in hiring,
so a firm wanting one employee may have several job postings; these practices too can change over time. Moreover,
with reports of tight labor markets (whether accurate or not) so prevalent in the press and with evidence of high
turnover, some firms would move to not only advertise more jobs (reinforcing the picture of high vacancies) but hire
more workers—essentially a 21st century version of labor hoarding.
50 J.E. Stiglitz and I. Regmi

The implication of this analysis is that the (partly temporary) increase in vacancy and quit rates

Downloaded from https://academic.oup.com/icc/advance-article/doi/10.1093/icc/dtad009/7071722 by National Science & Technology Library user on 09 March 2023
should not necessarily be seen, as some monetary authorities seem to have done,140 as indicators
of an acute labor shortage. As Bloesch (2022b) concludes:

[N]ot much has changed to make one conclude that the unemployment rate consistent with low
inflation, the so-called “natural rate” is higher than before. Instead, it looks increasingly possible
that the labor market can return to a strong but not overheating equilibrium, giving time for
supply-side issues to be resolved and bring inflation back down.

140 In September 2022, Federal Reserve Chair Powell asserted “… that (vacancies) and quits are really very good
ways to look at how tight the labor market is” (Powell, 2022a; Powell, 2022b).

The Subtle Art of Not Giving a F*ck: A Counterintuitive Approach to Living a Good Life
From Everand
The Subtle Art of Not Giving a F*ck: A Counterintuitive Approach to Living a Good Life
Mark Manson
4/5 (6411)
Principles: Life and Work
From Everand
Principles: Life and Work
Ray Dalio
4/5 (640)
The Gifts of Imperfection: Let Go of Who You Think You're Supposed to Be and Embrace Who You Are
From Everand
The Gifts of Imperfection: Let Go of Who You Think You're Supposed to Be and Embrace Who You Are
Brené Brown
4/5 (1173)
Never Split the Difference: Negotiating As If Your Life Depended On It
From Everand
Never Split the Difference: Negotiating As If Your Life Depended On It
Chris Voss
4.5/5 (990)
The Glass Castle: A Memoir
From Everand
The Glass Castle: A Memoir
Jeannette Walls
4.5/5 (1851)
Sing, Unburied, Sing: A Novel
From Everand
Sing, Unburied, Sing: A Novel
Jesmyn Ward
4/5 (1267)
The Perks of Being a Wallflower
From Everand
The Perks of Being a Wallflower
Stephen Chbosky
4.5/5 (4101)
Her Body and Other Parties: Stories
From Everand
Her Body and Other Parties: Stories
Carmen Maria Machado
4/5 (887)
Shoe Dog: A Memoir by the Creator of Nike
From Everand
Shoe Dog: A Memoir by the Creator of Nike
Phil Knight
4.5/5 (627)
The Hard Thing About Hard Things: Building a Business When There Are No Easy Answers
From Everand
The Hard Thing About Hard Things: Building a Business When There Are No Easy Answers
Ben Horowitz
4.5/5 (361)
HSC Eco Essay Plans
No ratings yet
HSC Eco Essay Plans
65 pages
Hidden Figures: The American Dream and the Untold Story of the Black Women Mathematicians Who Helped Win the Space Race
From Everand
Hidden Figures: The American Dream and the Untold Story of the Black Women Mathematicians Who Helped Win the Space Race
Margot Lee Shetterly
4/5 (1015)
Steve Jobs
From Everand
Steve Jobs
Walter Isaacson
4.5/5 (1138)
Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future
From Everand
Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future
Ashlee Vance
4.5/5 (581)
The Emperor of All Maladies: A Biography of Cancer
From Everand
The Emperor of All Maladies: A Biography of Cancer
Siddhartha Mukherjee
4.5/5 (297)
Angela's Ashes: A Memoir
From Everand
Angela's Ashes: A Memoir
Frank McCourt
4.5/5 (943)
The Yellow House: A Memoir (2019 National Book Award Winner)
From Everand
The Yellow House: A Memoir (2019 National Book Award Winner)
Sarah M. Broom
4/5 (100)
The Art of Racing in the Rain: A Novel
From Everand
The Art of Racing in the Rain: A Novel
Garth Stein
4/5 (4355)
Devil in the Grove: Thurgood Marshall, the Groveland Boys, and the Dawn of a New America
From Everand
Devil in the Grove: Thurgood Marshall, the Groveland Boys, and the Dawn of a New America
Gilbert King
4.5/5 (278)
The World Is Flat 3.0: A Brief History of the Twenty-first Century
From Everand
The World Is Flat 3.0: A Brief History of the Twenty-first Century
Thomas L. Friedman
3.5/5 (2289)
Bad Feminist: Essays
From Everand
Bad Feminist: Essays
Roxane Gay
4/5 (1087)
A Tree Grows in Brooklyn
From Everand
A Tree Grows in Brooklyn
Betty Smith
4.5/5 (2032)
The Outsider: A Novel
From Everand
The Outsider: A Novel
Stephen King
4/5 (2876)
A Heartbreaking Work Of Staggering Genius: A Memoir Based on a True Story
From Everand
A Heartbreaking Work Of Staggering Genius: A Memoir Based on a True Story
Dave Eggers
3.5/5 (233)
Team of Rivals: The Political Genius of Abraham Lincoln
From Everand
Team of Rivals: The Political Genius of Abraham Lincoln
Doris Kearns Goodwin
4.5/5 (244)
Factors Influencing The Perception of The Selling Price of Luxury Apartments
No ratings yet
Factors Influencing The Perception of The Selling Price of Luxury Apartments
10 pages
Fear: Trump in the White House
From Everand
Fear: Trump in the White House
Bob Woodward
3.5/5 (835)
Manhattan Beach: A Novel
From Everand
Manhattan Beach: A Novel
Jennifer Egan
3.5/5 (918)
GDP, GNP, Balance of Payments and Trade Report
No ratings yet
GDP, GNP, Balance of Payments and Trade Report
52 pages
Rise of ISIS: A Threat We Can't Ignore
From Everand
Rise of ISIS: A Threat We Can't Ignore
Jay Sekulow
3.5/5 (144)
John Adams
From Everand
John Adams
David McCullough
4.5/5 (2546)
The Light Between Oceans: A Novel
From Everand
The Light Between Oceans: A Novel
M.L. Stedman
4.5/5 (814)
The Unwinding: An Inner History of the New America
From Everand
The Unwinding: An Inner History of the New America
George Packer
4/5 (45)
Little Women
From Everand
Little Women
Louisa May Alcott
4.5/5 (2369)
Unit 1 - 2marks
No ratings yet
Unit 1 - 2marks
4 pages
Nguyên Lý Quản Lí Kinh Tế
No ratings yet
Nguyên Lý Quản Lí Kinh Tế
33 pages
Gorton - Pennacchi (1990) - Financial Intermediaries and Liquidity Creation - JF
No ratings yet
Gorton - Pennacchi (1990) - Financial Intermediaries and Liquidity Creation - JF
24 pages
COBMECO Practice Set Only 2
No ratings yet
COBMECO Practice Set Only 2
4 pages
Dessalegn Worku, Thesis Final Draft-August-2020
No ratings yet
Dessalegn Worku, Thesis Final Draft-August-2020
75 pages
Listening - Script 9 Units - Sao Chép
No ratings yet
Listening - Script 9 Units - Sao Chép
12 pages
144 A1 Eng - 31 August 2022
No ratings yet
144 A1 Eng - 31 August 2022
13 pages
Case Study Math
No ratings yet
Case Study Math
17 pages
exam1BD Solutions
No ratings yet
exam1BD Solutions
8 pages
stand out...
No ratings yet
stand out...
10 pages
ECONOMICS 2 - Exam n Answers - MSOMIBORA.COM 2
No ratings yet
ECONOMICS 2 - Exam n Answers - MSOMIBORA.COM 2
16 pages
HET Chapter 4
No ratings yet
HET Chapter 4
23 pages
chapter 4 (IM)
No ratings yet
chapter 4 (IM)
11 pages
Rural Households Behaviour in Investment
No ratings yet
Rural Households Behaviour in Investment
60 pages
Unit 14 Econ 144
No ratings yet
Unit 14 Econ 144
27 pages
Loewenstein 1996 Visceral Influences On Behavior
No ratings yet
Loewenstein 1996 Visceral Influences On Behavior
21 pages
1 s2.0 S0304387813001120 Main
No ratings yet
1 s2.0 S0304387813001120 Main
17 pages
out
No ratings yet
out
11 pages
Term Paper
No ratings yet
Term Paper
20 pages
Aggregate Demand (AD) : AD and AS Online
No ratings yet
Aggregate Demand (AD) : AD and AS Online
52 pages
Measuring Welfare Consumption
No ratings yet
Measuring Welfare Consumption
58 pages
Alp, Tech. Mayhs e - Book
0% (1)
Alp, Tech. Mayhs e - Book
79 pages
Ag. Econ 2 (Consumer Behaviour)
No ratings yet
Ag. Econ 2 (Consumer Behaviour)
37 pages
Utility and Diminishing marginal utility
No ratings yet
Utility and Diminishing marginal utility
4 pages
Sample
No ratings yet
Sample
242 pages
Lifecycle Consumption and Life Insurance: A Systematic Literature Review
No ratings yet
Lifecycle Consumption and Life Insurance: A Systematic Literature Review
25 pages
Rural Vs Urban Markets
100% (2)
Rural Vs Urban Markets
2 pages

The Causes of and Responses To Today's Inflation: Joseph E. Stiglitz and Ira Regmi

Uploaded by

The Causes of and Responses To Today's Inflation: Joseph E. Stiglitz and Ira Regmi

Uploaded by

Industrial and Corporate Change, 2023, 00, 1–50

The causes of and responses to

1.1. Theories of inflation and disentangling demand and supply

1.2. Designing a policy response

1.3. The organization of the paper

2. Excess aggregate demand is not the primary source of inflation

2.1. Real personal consumption is only slightly above trend

2.2. Government expenditures

Figure 4. Real government expenditures are not significantly above trend

Figure 6. Inventory accumulation shot up in 2021

Figure 7. Investment in plants and equipment is below trend

Figure 9. Real net exports have plummeted

2.4. Net exports

2.5. Aggregate demand

Figure 15. Personal savings rate

2.7. Concluding comment

Figure 17. Consumption expenditures on some major product types

3. The supply side is the driver of inflation

3.2. Goods inflation is significant, historically unique, driven by supply-side

3.2.1. Core inflation and the perpetuation of inflation

3.3. Large sectoral shifts in demand—partially induced by supply shortages—can

3.4. There were large shifts in patterns of demand for housing

4. The labor market is not a major driver of inflation54

4.1. The big picture

Figure 24. Average hourly real earning of all employees

4.2. Wage–price dynamics

4.3. Policy responses

sectoral shortages—including in non-traded goods—leading to inflation as the economy struggled

6. Parsing the roles of demand and supply

7. Implications of aggressive interest rate hikes

7.1 Why interest rate increases may be counterproductive

7.3 Global consequences and economic fragilities

9. Concluding remarks: the need for a measured monetary response

9.1. The challenges of policy

9.3. Toward a judicious monetary policy in a world of uncertainty

Appendix 1: Analyzing potential output

121 Board of Governors of the Federal Reserve System (2022).

Figure A2. Working-age population

Appendix 2: Explaining the lack of resilience

Appendix 3: Case studies

Appendix 4: US and global labor market

You might also like