US inflation driven by rising demand and supply chain constraints

The majority of pandemic-era inflation in the United States came from an increase in demand, but supply chain constraints stoked it further, according to research from the Federal Reserve Bank of New York. .

According to New York Fed analysis, about 60% of observed inflation from 2019 to 2021 was due to demand-side factors, with the rest stemming from supply issues.

“The result of this decomposition is that supply constraints amplified the impact of higher demand on inflation,” wrote Julian di Giovanni, head of climate risk studies at the research group and of statistics from the New York Fed, in a blog post published on Wednesday.

Di Giovanni found that most sectors in the United States – or 58 out of 66 – were affected by supply constraints, such as labor shortages and logistical bottlenecks, during the pandemic. . He estimated that without these challenges, the annual inflation rate would have reached 6% at the end of 2021, instead of 9%.

However, demand-side factors played a larger role in driving up prices. Fiscal and monetary support have led to an increase in aggregate demand, and “the composition of demand has also changed as consumers have shifted from services to goods,” he said. This led to more imbalances between supply and demand, which amplified the effects of supply constraints, the researcher said.

“In other words, the fiscal stimulus and other aggregate demand factors would not have resulted in such high inflation had it not been for the pandemic-related supply constraints,” di Giovanni wrote.

The consumer price index rose 8.5% in July from a year earlier, down from the 9.1% annual increase seen in June, which marked a 40-year high. years for the rate of inflation, according to data from the Labor Department.

Fed officials are aggressively raising interest rates to combat these sharp price increases by reducing demand and slowing growth. The US central bank raised rates by 75 basis points in July for the second month in a row.

Officials are likely to raise rates by 50 basis points or 75 basis points when they meet next month, according to policymakers, who will be determined by economic data. They will be able to review another jobs report and receive another consumer price update before meeting again on September 20-21.