Root Causes of the Inflation Surge in the US

Hélène BAUDCHON * Deputy Chief Economist, Team Manager OCDE, BNP Paribas. Contact : helene.baudchon@bnpparibas.com.

The chronology of the 2021-2022 inflationary shock is quite clear. What is less so, behind the multitude and confluence of sources, is the role played by supply and demand factors. A simple analysis of the contributions of the main items of the consumer price index to US inflation highlights the greater relative importance of core inflation compared to energy and food inflation, and thus suggests that US inflation is more demand-driven than supply-driven. Other more advanced studies, however, temper this view by highlighting the importance of supply factors as well, through the role played by the series of shocks to energy, raw goods, and commodity prices. It even appears that, without these supply factors, demand-side inflation would not have been as high. While, in early 2024, the process of disinflation is well under way, partly thanks to determined central bank action, there is still some way to go before inflation returns to the 2% target on a sustainable basis. Also, in the future, 2% could be more of a floor than a ceiling.

Will the resurgence of US inflation fade away as quickly as it emerged, possibly within two years? The surge in inflation that began at the turn of 2020 and 2021, which was initially perceived as transitory, proved to be unexpected and unprecedented, not only in the United States but also in many other parts of the world. The surge propelled inflation to levels not witnessed since the 1970s. This resurgence marked the return of inflation with a capital “I”, denoting a generalised and self-sustaining upward trend in prices. However, starting from mid-2022 when US inflation reached its peak, there was a gradual but beneficial decline in inflation, a trend that gained momentum throughout 2023. Despite this progress, the process remained incomplete, as inflation persisted above the 2% target by the end of December 2023. The disinflation…