The worst inflation outbreak in 40 years: Distilling lessons from the COVID era

Edited by Karen Dynan () and David Wilcox ()

No PIIEB26-1 in PIIE Briefings from Peterson Institute for International Economics

Abstract: During the recovery from COVID-19, inflation in the United States and many other countries surged to its highest level in more than 40 years, inflicting enormous pain on households and businesses, upending fundamental patterns of economic activity, and changing the course of politics and societies worldwide. To distill lessons from that era, the Peterson Institute for International Economics spearheaded a special project--codirected by Karen Dynan and David Wilcox--convening leading experts to examine different facets of the inflation surge, including supply-side disruptions, demand dynamics, labor markets, fiscal and monetary policy interactions, and inflation measurement. Their published papers are brought together in this PIIE Briefing. Key Takeaways The inflation surge was global, but its underlying drivers differed across countries. In the United States, excess demand combined with inelastic supply to generate the inflation surge. Monetary policy flexibility is critical when inflation risks are outsized, and forecasting errors are likely. On fiscal policy, the difficulty of identifying real-time capacity constraints strengthens the case for greater automatic adjustment features. Anchored inflation expectations played a critical role in enabling rapid disinflation in the early 2020s--but they cannot be taken for granted going forward. Official inflation statistics performed well during the COVID era, but continued investment in measurement capacity is essential.

Date: Written 2026-02
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