Òscar Jordà, Fernanda Nechio
Whereas the decade before the COVID-19 pandemic saw a steep decline in inflation globally, the end of the pandemic marked the return of inflation rates last seen in the 1980s. Pandemic-related supply disruptions are an obvious explanation. However, another contributing factor has been some of the most generous pandemic support packages on record. This column exploits variation in governments’ fiscal responses to show that a large portion of the resurgence in inflation can be attributed to the generosity of governments towards their citizens. The traditional Phillips mechanism is alive and well – a boost to demand causes prices to rise.