2021–2023 Inflation Surge

Following the COVID-19 pandemic in 2020, a worldwide surge in inflation began in mid-2021 and lasted until mid-2022. Many countries saw their highest inflation rates in decades. It has been attributed to various causes, including pandemic-related economic dislocation, supply chain disruptions, the fiscal and monetary stimulus provided in 2020 and 2021 by governments and central banks around the world in response to the pandemic, and price gouging. Preexisting factors that may have contributed to the surge included housing shortages, climate impacts, and government budget deficits have also been cited as factors. Recovery in demand from the COVID-19 recession had, by 2021, revealed significant supply shortages across many business and consumer economic sectors.

In early 2022, the Russian invasion of Ukraine's effect on global oil prices, natural gas, fertilizer, and food prices further exacerbated the situation. Higher gasoline prices were a major contributor to inflation as oil producers saw record profits. Debate arose over whether inflationary pressures were transitory or persistent, and to what extent price gouging was a factor. All central banks (except for the Bank of Japan, which had kept its interest rates steady at –0.1% until 2024) responded by aggressively increasing interest rates.

The inflation rate in the United States and the eurozone peaked in the second half of 2022 and sharply declined in 2023. At its peak, the United States had its highest inflation rate since 1981 and the eurozone its highest since records began in 1997. Despite a worldwide decline, some economists have speculated that higher consumer prices are unlikely to return to pre-pandemic levels and may remain elevated. Economists state that for prices to return to pre-pandemic levels a deflationary period would be required, which is usually associated with recession. As of 2024, the United States was approaching target inflation while growing the economy, also known as a 'soft landing'. As of 2025, inflation rates remain elevated above the Fed’s “target rate” of 2%. It is currently unclear whether more interest rate hikes, or a recession will be the harbinger of lower inflation rates in the future.

Background and causes

Consumer spending on goods in the United States and elsewhere moved in tandem with spending on services (see goods and services) before the COVID-19 recession, but upon emerging from the recession consumers shifted spending towards goods and away from services, particularly in the United States. This shift placed stress on supply chains, such that the supply of goods could not meet demand, resulting in price increases. In November 2021 inflation in the United States was 14.9% for durable goods, compared to 10.7% for consumable goods and 3.8% for services. Similar situations occurred in several other major economies. Supply chain stresses increased prices for commodities and transportation, which are cost inputs for finished goods.

In countries where food constituted a large part of the inflation increase, rising prices forced low-income consumers to reduce spending on other goods, thereby slowing economic growth. "In those countries with high inflation, consumer spending has weakened because household spending power has taken a hit from rising prices," said William Jackson of Capital Economics, "And you've generally seen much more aggressive moves to tighten monetary policy."

In June 2022, ''The Atlantic'' published an editorial article critical towards the U.S. Department of the Treasury controlling inflation. In 2021, Janet Yellen called the risk of inflation "small" and "manageable", and equally Federal Reserve Chairman Jerome Powell thought inflation would be "transitory", even as inflation rose above 6 percent. In 2023, the International Monetary Fund ascertained that "food and energy are the main drivers of this inflation", as rising prices continue to squeeze living standards not only in North America but worldwide.

Six out of ten (59%) EU enterprises were concerned about energy prices in 2023, and five out of ten (47%) were concerned about uncertainty, with some country variations. Energy cost rises were more common in EU businesses than in US firms (93% vs. 83%). Manufacturing businesses were the most likely to have encountered a 25% or more rise in energy spending, while the construction sector had the lowest number of firms suffering a 25% or greater increase in energy spending, although more than half of firms reported this.

Supply chain disruptions

Some economists attribute the U.S. inflation surge to product shortages resulting from the global supply-chain problems, itself largely caused by the COVID-19 pandemic. This coincided with strong consumer demand, driven by low unemployment and improved financial conditions following the pandemic. The higher demand caused by the U.S. government's $5 trillion aid spending exacerbated supply-side issues in the United States; according to the Federal Reserve Bank of San Francisco researchers, this contributed 3 percentage points to inflation by the end of 2021. They argued that the spending measures were nevertheless necessary to prevent deflation, which would have been harder to manage than inflation.

Consumer prices have reached an all-time high within the last thirty years, soaring by 6.2% from the previous year, things like restaurant prices to clothes and the most popular being fuel, have drastically increased. Fuel prices rose by 49% from January to June 2022 in the United States. During the pandemic, the number of workers working worldwide plunged and had an immediate impact on the United States as less than a third of the global population has been vaccinated. Countries that supplied the United States with shoes and clothes such as Vietnam have had factory hub shortages due to not having enough vaccinated workers.

In June 2022, BlackRock CEO Larry Fink argued that consumer demand in the United States had remained steady compared to pre-pandemic years, with supply-chain issues overseas being the primary cause of the post-pandemic inflation surge. He attributed this to some countries taking longer (than the U.S.) to resume economic activity, thereby disrupting international trade.

Shifting demand

During the COVID-19 lockdown, demand shifts during the pandemic towards many home-related goods outpaced supply, contributing to inflation. Demand for groceries has continued to be high after the pandemic as people's habits have changed, which is one of the factors pushing up grocery prices into 2024. Increasing energy demand is one of the causes of persistent energy inflation.

Fiscal and monetary policy

Among the factors contributing to the surge of inflation were the unprecedented levels of fiscal and monetary stimulus enacted to sustain household incomes and the liquidity of financial institutions in the 2020–2021 period. Many governments around the world adopted such stimulatory actions early in the COVID-19 pandemic.

Some immediate actions were taken by banking systems around the world by increasing interest rates or making changes to other policies. Higher interest rates make borrowing more expensive, reducing consumption. This is put into place purposely to maintain a level of consumption that will contribute to a steady level of inflation or decrease it, this is also known as inflation targeting.

Deficit spending increases inflation, as detailed in the fiscal theory of the price level. Tax cuts are generally viewed as inflationary while tax hikes are usually viewed as deflationary.

Milton Friedman, a libertarian-conservative monetary economist who was awarded the 1976 Nobel Prize in economics, said in 1963 that "inflation is always and everywhere a monetary phenomenon." Austrian school economist Gottfried von Haberler amplified Friedman in 1985, asserting, "there has never been a significant inflation or stagflation — prices rising, say, by 4 percent or more a year for two or more years — without a significant growth in the stock of money." This quantity theory of money has long been popular with libertarian-conservative critics of the Federal Reserve. During the pandemic and its immediate aftermath, the M2 money supply increased at the fastest rate in decades, leading some to link the growth to the inflation surge. Fed chairman Jerome Powell said in December 2021 that the once-strong link between the money supply and inflation "ended about 40 years ago," due to financial innovations and deregulation. Powell's immediate predecessors, Ben Bernanke and Alan Greenspan, had previously concurred with this position. The broadest measure of money supply, M3, increased about 45% from 2010 through 2015, far faster than GDP growth, yet the inflation rate declined during that period — the opposite of what monetarism would have predicted. A lower velocity of money than was historically the case was also cited for a diminished effect of growth in the money supply on inflation.

Housing shortage

Lags in the construction of new housing were cited as a major factor in inflation in the US, with Katy O'Donnell of ''Politico'' arguing that housing shortages were the single-biggest contributor to inflation. The U.S. Census Bureau found that if housing costs were taken out, inflation at the end of 2023 would have been 1.8% instead of 3.2%. ''Reuters'' noted how shelter costs or 'shelter inflation' surged during the pandemic. Artificial scarcity in the supply of housing, due to NIMBYism, has been a significant factor in making housing more expensive. Freddie Mac

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