Inflation Drivers: A Post-COVID Analysis

Abstract

The post-COVID inflationary surge and subsequent disinflation have generated significant debate regarding their causes and policy implications. This paper assesses the drivers of inflation from the onset of the COVID-19 pandemic through the subsequent disinflation, with a particular focus on the sharp decline in inflation from June to July 2022. Using the Consumer Price Index (CPI), this analysis evaluates six primary explanations for inflationary trends: energy price shocks, supply chain disruptions, firm pricing power, wages and worker bargaining power, inflation expectations, and government stimulus.A Rolling-Window Granger Causality model is employed to assess the temporal relationships between inflation and key economic indicators, allowing for a structural break in the data coinciding with initial stay-at-home orders. This approach identifies real personal expenditures, and the labor leverage ratio as significant contributors to the initial inflationary surge, while over-water shipping costs and the Federal Funds Rate exhibits a delayed relationship with disinflation. A time-interaction linear model is further applied to test the impact of identified economic events on inflation trends, revealing a lack of support for the common narrative that corporate profits, consumer income, or government transfers significantly drove inflation.The findings suggest that inflation was largely driven by real economic shifts rather than speculative price-setting behavior, and that Federal Reserve policy may not have been the primary driver of disinflation. These results highlight the need for a more nuanced approach to assessing the causes of inflation and the efforts to mitigate it.