Inflation can occur when too much money chases too few goods and services, but it can also result from supply disruptions, rising production costs, or global economic shocks. It suggests that inflation can come from either the demand side (a surge in demand or money), or the supply side (a shortage of supply). So here is the question: Which side is the main driver behind the COVID-era inflation?
I have always thought both share the equal blame. There was too much money, and the supply was constrained due to supply chain disruptions. But after listening to a recent podcast featuring Stephanie Kelton, my view changed significantly.
Kelton’s research point out that it was the supply chain disruption that was the main driver. The government stimulus was a factor, but not a leading one.
It was a surprise to me. So I looked into the supporting literature. Here are some details.
1. Brookings Series by Orszag, Brooks, and Murdock
In a three-part series published by the Brookings Institution, Peter Orszag, Robin Brooks, and William E. Murdock III argue that U.S. inflation during the COVID-19 pandemic was primarily a result of supply-side shocks rather than excessive demand from stimulus spending. They point to persistent disruptions in supply chains, a shift in consumer spending from services to goods, and increased corporate pricing power as central drivers of price increases. In particular, the authors suggest that the Federal Reserve may have misjudged inflation dynamics by reacting aggressively to what was largely a transitory supply shock.
The follow-up articles, including “The lagged effects of COVID-19 supply chain disruptions on inflation” and “US disinflation and the COVID-19 supply shock”, underscore how price pressures have eased as supply conditions normalized, reinforcing the conclusion that inflation was not fundamentally driven by overheating demand. The series collectively challenges the notion that government stimulus was the primary inflationary culprit.
2. “What Caused the U.S. Pandemic-Era Inflation?” by Bernanke & Blanchard
In this working paper, former Federal Reserve Chair Ben Bernanke and former IMF Chief Economist Olivier Blanchard conduct a structured analysis of pandemic-era inflation, aiming to quantify the relative contributions of supply disruptions and demand surges. Their findings indicate that both supply and demand played roles, but supply-side constraints—particularly in the labor market and goods-producing sectors—had the dominant effect, especially in the early stages of inflation acceleration. They also note that demand stimulus (e.g., fiscal transfers like the $1,400 checks) contributed, but its effect was more limited and delayed.
One of their major conclusions is that while monetary tightening has played a role in bringing inflation down, policymakers should consider the source of inflation when deciding how aggressive a response should be. In other words, using interest rates to combat supply-driven inflation can be both blunt and costly, potentially slowing the economy more than necessary.
3. IMF Paper: “Demand vs. Supply Decomposition of Inflation”
This paper from the International Monetary Fund offers a quantitative decomposition of inflation across 32 countries, including the United States, using structural modeling and real-time data. The authors conclude that supply factors—such as higher energy prices, shipping delays, and raw material shortages—were dominant in explaining the surge in global inflation. The paper also highlights that the pass-through from supply shocks to inflation has been more persistent than many central banks anticipated, partly due to expectations anchoring and adaptive wage-setting behavior.
While demand-side influences did emerge—particularly in countries with strong fiscal responses—the study finds that these effects were smaller in magnitude. The IMF emphasizes that policy responses should differentiate between supply- and demand-driven inflation, cautioning against over-reliance on monetary tightening in response to price hikes rooted in constrained supply.
4. IMF Paper: “Assessing the Impact of Supply Disruptions on the Global Pandemic Recovery”
This IMF study focuses specifically on the macroeconomic effects of supply chain disruptions during the global recovery from COVID-19. Using cross-country macroeconomic modeling, the authors find that supply-side bottlenecks, especially in shipping and semiconductor production, significantly dampened global output and contributed to inflation. The disruptions created cascading effects across industries and regions, disproportionately affecting countries reliant on imported intermediate goods.
The authors argue that these frictions were not short-lived and exposed vulnerabilities in globally integrated supply networks. Their analysis supports the view that inflation during the recovery period was less about overstimulated demand and more about constrained productive capacity and logistics failures, further reinforcing the theme seen in other research.
Summary
Across all those sources, a consistent narrative emerges: supply-side disruptions were the primary drivers of the inflation experienced during and after the COVID-19 pandemic. While demand-side factors, including fiscal stimulus, did contribute in certain sectors and timeframes, their overall impact was modest compared to the profound effects of supply shocks — from labor shortages to logistics breakdowns.
These findings challenged simplistic attributions of inflation to government stimulus checks and suggest that central banks should be cautious in using aggressive monetary policy responses to inflation not rooted in excess demand. But more importantly, they reinforced my belief in the importance of supply chain management. It is at the core of our global economy. Without the smooth operations of actively matching demand with supply, the world could be, and would be, in a much worse place.
Supply chain matters.
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