The recent surge in inflation has prompted a host of different theories about its cause. Some economists believe that early during the lockdown, supply shocks reduced the availability of important goods—such as food and medicine—and thus triggered inflation. Others point to the large stimulus packages, which temporarily increased consumers’ spending power but also raised prices. Still others note that, when a product becomes more expensive, its lower-income consumers are hurt the most. As savings are eroded, and loans at higher fixed interest rates become more costly, lower-income families have to spend an increasing share of their income on necessities.
Other economists, however, believe that the surge in inflation was largely demand-driven. As the economy recovered from the initial lockdown, many people who had been unable to work resumed their jobs and spent money. This boosted demand and drove up prices, especially for services, which make up about half of the Consumer Price Index.
Moreover, profit-maximizing firms often respond to inflationary pressures by raising their prices. This can reverberate through the economy, leading to higher prices for many other goods and services. This is known as demand-pull inflation. It can also be triggered by an increase in the amount of money in the economy, as a result of government spending or central bank policy, or by events that raise production costs. Ultimately, the key to interpreting inflation is recognizing that (just like the rabbit-duck drawing above) all of these perspectives are possible at once.