The Causes of Pandemic Inflation

L. Randall Wray

Economics One-Pager Archive from Levy Economics Institute

Abstract: While the trigger for the COVID recession was unusual--a collapse of the supply side that produced a drop in demand--the inflation the US economy is now facing is not atypical, according to L. Randall Wray. In this one-pager, he explores the causes of the current inflationary environment, arguing that continuing inflation pressures come mostly from the supply side. Wray warns that, given federal spending had already been declining substantially before the Fed started raising interest rates, rate hikes make a recession--and potentially stagflation--even more likely. A key part of our fiscal policy response should be focused on well-designed public investment addressing the substantial supply constraints still affecting the US economy--constraints that are not just due to the Covid crisis, but also decades of underinvestment in infrastructure. Such an approach, in Wray's view, would reduce inflationary pressures while supporting growth.

Date: 2022-12
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