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Lessons from the Inflation of 2021-202(?)

Lessons from Current Inflation Bout

by: Asha Banerjee, Josh Bivens

December 03, 2022 |
Working Paper,
Conference Paper

Why did inflation surge in 2021 and remain high throughout 2022? Asha Banerjee and Josh Bivens argue in their PERI inflation conference paper that this episode has exposed how little innovative thinking has been done on inflation since the 1980s, and that the evidence in support of a macroeconomic “overheating” explanation is weak. A more consistent explanation focuses on the extreme shocks causing sectoral demand and supply imbalances. These sectoral shocks caused large ripple effects in the wider economy through distributional conflict—i.e. conflicts over which groups would absorb the economic losses from higher prices.

>> Research paper here
>> Bivens non-technical summary article here

This paper was presented as part of the "Global Inflation Today" conference at PERI, December 2022. For the full set of conference papers and conference commentary, video, and interviews, click here.

Starting in mid-2021, inflation in the United States rose to levels not seen since the early 1980s. This inflation followed on the heels of the economic shock imposed by the global COVID-19 pandemic and the significant fiscal policy interventions meant to smooth the fallout of this shock. As of October 2022, inflation – both headline and core measures stripping out food and energy prices – remained at historically high levels, though there are significant signs of softening in the near-future. This episode has sparked furious debate over the proper policy response, and has exposed how little innovative thinking has been done on inflation by either macroeconomists or policy analysts since the 1980s price acceleration was ended by the Volcker shock. This paper identifies a number of key questions raised by the inflationary outbreak of the past 18 months and offers some answers. An extremely brief summary of these questions and answers is provided below, with the rest of the paper expanding on these points.

>> Also read the Bivens' commentary "Learning the Right Lessons from Recent Inflation," published as part of the American Prospect's "Great Inflation Myths" series.

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