The COVID era inflation surge: Causes, consequences, and policy lessons

Karen Dynan () and David Wilcox
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Karen Dynan: Peterson Institute for International Economics

No PB26-3, Policy Briefs from Peterson Institute for International Economics

Abstract: he COVID era inflation surge was shaped by an unusual confluence of shocks and policy responses. It nonetheless raises enduring questions about the interaction of demand, supply, expectations, and policy frameworks that decision-makers are likely to confront again. In this Policy Brief, Dynan and Wilcox distill lessons from a broad body of work produced as part of the Peterson Institute for International Economics' Understanding the COVID Era Inflation project, which brought together an extensive group of experts to examine the different facets of the inflation surge. Dynan and Wilcox synthesize the group's insights to recount the origin of the surge, evaluate the key causes and consequences, discuss the limits and strengths of policy tools, and offer lessons for policymakers to deal with future undesirable increases in inflation. Key Takeaways Inflation surged globally, but its specific underlying drivers differed across economies, with implications for policy. In the United States, excess demand combined with inelastic supply to generate the inflation surge. On the fiscal side, the difficulty of identifying real-time capacity constraints strengthens the case for greater reliance on automatic stabilizers. On the monetary side, in contrast, policy flexibility is especially critical in environments when uncertainty is elevated, and forecasting errors are likely.

Date: 2026-01
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