During a conversation with the Cato Institute in Washington, D.C., Federal Reserve Chair Jerome Powell says that none of the high inflation seen globally would have happened without the pandemic. Mr. Powell says the pandemic “severely disrupted the economy” by causing shifts in demand and supply-side constraints, as well as a reduction in the size of the labor force.
I think a good entry point for that question, peter is to start by recalling that before the pandemic, unemployment was at a 50-year low, inflation was low and stable and the economy was growing stable– i’m sorry, steadily with no balances threatening expansion. None of this high inflation we see around the world now would have happened without the pandemic. The pandemic severely disrupted the economy, gave rise to risks of much more dire economic consequences thatten actually transpired, really, thanks in part to the policy response. So to start with policy, there’s no question that policy certainly supported strong demand, but in my view, you would not have seen anything like the inflation that we’ve seen without the pandemic effects. And those pandemic effects include shifts in demand and also, playing a role in, not solely causing, but playing a role in the supply side constraints that emerged. So after the pandemic, it did lead directly to an extraordinary shift in demand away from in-person services and to goods and that shift, of course, was a major contributor to inflation in goods prices which is the main inflation story at the beginning when inflation broke out suddenly in march of 2021. It’s worth remembering that declined in the pandemic and suddenly rose up in march of ’21. The pandemic contributed to con strain supply in a number of important ways, including a large and persistent reduction in the size of the labor force, which contributed to extremely tight labor market conditions and upward pressure on wages, also the turmoil in global supply chains was probably caused by, to some extent by pandemic related shutdowns and strong demand and particularly goods demand. I think that cars are a good example. Yes, people had money and rates were low and demand for cars was strong, but also, the pandemic shifted demand upward for cars because some people wanted to avoid public transportation. That amped up new demand, demand for new and used cars and also the shortage of semiconductors for cars emerged from pandemic related demand shift as well. So, you know, the bottom line for me is that there’s really a role for both here, and the two were tangled up in a way that it’s really not easy