When inflation is high, shoppers’ paychecks don’t go as far as they used to. Inflation also hurts savers who see their cash erode in value over time and borrowers who pay higher interest rates on loans that are repaid sooner than expected.
After staying dormant during the early stages of the COVID-19 pandemic, global inflation surged after 2020 as oil prices spiked and supply disruptions deepened. Then it slowed down, but has been climbing again since 2022, and is now above the pre-pandemic average.
Many forecasters assumed that the rise in inflation was due primarily to higher wage pressures as employers bid up workers’ salaries. But the authors show that this explanation doesn’t really hold up. In fact, most of the increase in inflation between 2020 and mid-2022 came from developments that directly raised prices rather than wages. These included sharp increases in global commodity prices, kinks in supply chains caused by the pandemic and other factors, and a shift in demand during the pandemic away from goods toward services.
Firms set prices with an eye to profits, but they also try to anticipate whether monetary authorities will tame inflation by raising interest rates. As a result, when inflation is high, firms may think that they will be unable to easily change their prices, so they might not raise them even though they can afford to. This is known as “stickiness” in pricing decisions.
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