What Caused the US Pandemic-Era Inflation?

Abstract

We estimate a simple dynamic model of prices, wages, and short-run and long-run inflation expectations that allows us to analyze and quantify the sources of recent US inflation. We find that, contrary to early concerns that inflation would be spurred by overheated labor markets, most of the inflation surge resulted from shocks to prices given wages. Although tight labor markets have, thus far, not been the primary driver of inflation, we find that they have a relatively more persistent effect on wage growth and inflation. Controlling inflation will, thus, ultimately require achieving a better balance of labor demand and supply. (JEL E12, E24, E31, E62, I12)