What caused high inflation after COVID?
Updated: Dec 3, 2022
Covid-19 has caused a global economic recession, leading to a decrease in aggregate demand and an increase in unemployment. This has caused a decrease in consumer spending, leading to a decrease in production and an increase in prices, which is the main cause of inflation. Additionally, government stimulus programs, such as the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and other fiscal policies, have caused an increase in the money supply, which has also contributed to inflation.
Supply Chain- The supply chain has been dramatically impacted by the COVID-19 pandemic. As the pandemic progressed, many companies experienced a surge in demand for certain products, such as food and medical supplies, and a decrease in demand for other products. Major changes in the supply chain due to WHO pandemic measures, included disruption of global trade, production delays, supply chain shortages, and the need to move from traditional to digital operations urgently. Companies had to adjust supply chain operations to incorporate social distancing and other safety measures, such as contactless delivery, distance between workers, etc. Additionally, many companies have shifted to digital operations, such as using digital payment systems and automated inventory management, to ensure business continuity. Finally, many companies are focusing on increasing agility and resilience in their supply chains to better prepare for future disruptions.
Stimulus programs- The stimulus checks in the US had a positive effect on inflation. According to analysis from the Federal Reserve Bank of San Francisco, the stimulus checks helped to raise the Consumer Price Index (CPI) by 0.8% in April of 2020. As the stimulus checks provided a direct infusion of income into households, consumer spending spiked, which led to higher demand for goods and services, which in turn drove up prices.
War in Ukraine- The effect of the war in Ukraine in 2022 on global inflation is difficult to predict, as it depends on how long the conflict lasts, how severe it is, and its impact on other countries. Inflation could rise if countries increase their military spending in response to the conflict or if the conflict disrupts global supply chains and causes prices to increase. Inflation could also decrease if the war causes a decrease in global demand, such as people and businesses cutting back on spending. Which is something we are starting to see from Q2 2022.
Energy prices- The sanctions put on Russia, due to the invasion of Ukraine, had a significant impact on global gas prices. Prices rose significantly due to supply disruptions caused by the conflict. In addition, the conflict caused a decrease in investment in the region's oil and gas infrastructure, leading to further price increases. Additionally, the conflict disrupted Ukraine's relationship with its major natural gas supplier, Russia, resulting in further price volatility. EU sanctions have caused an increase of Gas Price inflation due to its dependency on Russian gas. EU is starting to look elsewhere to find new gas suppliers, and middle east has shown great potential in becoming a new main partner to EU regarding energy supply.
In the next article, we will discuss how world economies are reacting to high inflation, and what measures are they taking to slow it down.