2021–2022 inflation surge

The 2021–2022 inflation surge refers to a sudden rise in prices across much of the world following the COVID-19 pandemic. During the inflation surge, the prices of most goods, such as grocery store items, rose between 5 and 9 percent. The prices of some essential goods, such as gasoline, rose by as much as 60 percent.

Numerous factors played a role in the inflation surge in 2021 and 2022. The COVID-19 pandemic caused severe disruptions to the global supply chain, resulting in sudden shortages of important goods across the world. With a reduced supply of essentials, prices rose. Additionally, the various stimulus packages temporarily increased the spending power of many consumers, which enabled manufacturers to charge more for their products and also caused shortages.

In February 2022 Russia invaded Ukraine, causing much of the Western world to initiate severe sanctions against Russian products. Though these sanctions made it more difficult for Russia to finance its war efforts, they caused prices to rise in certain markets. Most notably, the sanctions resulted in increased prices for petroleum products as Western nations boycotted Russian oil.

Background

Inflation refers to any type of rise in prices. When prices increase, the purchasing power of currency is reduced. Inflation is commonly contrasted with deflation, which occurs when prices decline and purchasing power increases. Because inflation is typically measured over time, its increase is usually represented with a percentage.

Tracking the price change of an individual product throughout its lifetime is simple. However, inflation must account for the prices of both commodities and necessities across a given market. Measuring large-scale price changes across an entire market is much more difficult. To track such changes, economists utilize price indexes, such as the Consumer Price Index (CPI), the Wholesale Price Index (WPI), and the Producer Price Index (PPI).

These indexes track the changes in the retail prices of specific subsets of consumer goods. The CPI uses a weighted average of a collection of goods and services such as food, medical care, and transportation. It is most often used to assess consumers’ cost of living. The WPI tracks changes in the costs of goods before they reach consumers and deals primarily with wholesale raw materials. Like the WPI, the PPI measures changes in the prices of wholesale goods. However, whereas the CPI measures prices from the buyer’s perspective, the PPI measures prices from the seller’s perspective.

Modern economists believe that inflation occurs when the supply of money in an economy grows faster than the value of that economy. If left unchecked, inflation and deflation can occur suddenly. To combat inflation and deflation, a central monetary authority, such as a central bank or government agency, works to manage the supply of money in the economy.

The supply of money in an economy can be increased in several ways. They include intentionally devaluing currency, loaning large amounts of new money to citizens, and printing additional funds to distribute to citizens. These economic events might be carried out for a reason unrelated to inflation. However, governments using these tactics must carefully monitor the rate at which inflation progresses. Though these changes might temporarily increase the purchasing power of businesses and consumers by granting them access to additional funds, they will eventually be counteracted by the increase in prices caused by inflation.

Inflation is usually divided into three categories: demand-pull inflation, cost-push inflation, and built-in inflation. Demand-pull inflation occurs when the demand for consumer goods increases faster than the economy’s ability to produce them. Because supply increases more slowly than demand, the price of goods increases. Cost-push inflation occurs when a new supply of money or credit is pushed into a specific market, most commonly a commodity market. This increase results in an inflated price for goods related to that market. Built-in inflation occurs when inflation rises at a continuous, steady rate. This rate is expected in most economic systems and typically offset by increases in wages. Though the purchasing power of a currency may drop, the purchasing power of consumers remains steady.

Overview

Beginning in 2021, inflation throughout much of the world began increasing at the fastest rate in roughly four decades. Prior to this time, most of the world had enjoyed decades of carefully controlled, low inflation. This gave economies a sense of stability and made it safe for them to invest their money.

Experts disagree about the specific cause of the 2021–2022 inflation surge. However, most agree that a sudden change in world circumstances played a major role in the disruption. In 2020, the COVID-19 pandemic swept across the world. The virus caused millions of deaths, significantly disrupting society throughout the Western world. Many nations, including China, Russia, and the United States, instituted widespread lockdowns intended to limit the spread of the virus. These lockdowns restricted work and travel for non-essential jobs, badly damaging the global supply chain. Some factories that produced staple consumer goods were temporarily closed, while some factories that remained open struggled to match pre-pandemic output during pandemic conditions. Additionally, the global shipping industry lacked the workers necessary to effectively ship and distribute the available goods because of the lockdowns and large number of sick individuals. These circumstances resulted in global shortages of numerous products.

Some economists believe that this sequence of supply shocks caused a sudden surge in inflation. As global shortages reduced supply and demand remained stagnant, the prices of essential goods rose faster than wages. Those who believed this theory predicted that the increased prices that resulted from the 2021– 2022 inflation surge would be temporary, with prices dropping after supply shortages were resolved, and consumers regaining confidence in the availability of important goods.

Other economists believe that the inflation surge was the result of a sudden increase in demand throughout the world economy that was driven by a sudden influx of spending power for both businesses and consumers throughout the Western world, particularly in the United States. During the COVID-19 pandemic, many people who were unable to work struggled to pay their bills. They reduced spending, fearing that the pandemic restrictions would last for an extended time, and they would need their savings to survive. This sudden reduction in spending harmed businesses, causing profits to drop along with consumer spending. Struggling businesses were forced to lay off workers or close, further shaking consumers’ confidence in the economy and reducing spending.

To break this cycle, many governments instituted massive stimulus programs, directly sending cash to both consumers and businesses. These programs significantly increased the amount of capital available in the economy, contributing to inflation. As spending levels rose when pandemic restrictions lifted, consumers and businesses continued to use the increased amount of capital available, driving up demand and suddenly increasing prices. If this theory is proven correct, experts believe that the inflation surge is more likely to be permanent.

In addition to the effects of global supply chain disruptions and stimulus packages, many consumers suffered from a sudden increase in transportation costs. When Russia invaded Ukraine in February 2022, many nations throughout the world responded with severe economic sanctions, which crashed the Russian economy, causing the value of the ruble to plummet. Additionally, many nations boycotted Russian petroleum and gasoline exports. Though these sanctions worked by making it more difficult for Russia to finance its war effort, they caused the global price of gasoline to sharply increase. In just twelve months, the price of unleaded gasoline in the United States increased more than 61 percent. In other nations, the cost of gasoline increased even higher.

The surge in gasoline prices made it more difficult for consumers to travel and more expensive for companies to utilize trucking fleets to ship goods. Increases in transportation costs further fueled the sudden rise in pricing, making it even more difficult for people to afford necessities. Gasoline prices peaked in the US in July 2022 but by December had dropped below the highest price of 2021.

As high inflation rates persisted through 2021 and 2022, economists disagreed about the potential duration of the inflation surge. In mid-2022 the US federal government set an inflation goal of 2 percent annually through 2024, though inflation rates remained higher than expected. After reaching an annual peak of 9.1 percent in June 2022, the highest rate since 1981, inflation rates later fell to 7.1 percent by November. Additionally, as the global supply chain stabilized and oil prices dropped, transportation costs for essential goods also fell. Economists argued that if companies passed these savings on to consumers in the form of reduced prices, inflation would return to stable levels. However, if companies chose not to reduce prices, inflation could continue to rise.

During 2022 many world governments took aggressive anti-inflationary policies, hoping to slow or stop the surge. The United States worked to reduce consumer demand, increasing interest rates to slow the influx of loaned money into the economy. By restricting the amount of funds available to consumers, the federal government hoped that demand would fall, resulting in lower prices and reduced inflation.

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