When prices rise and the purchasing power of money decreases, people lose spending power. Some companies benefit from inflation by increasing their prices and earning more profits. Investors also enjoy higher returns when investing in stocks whose prices are rising. Inflation harms savers, who see their cash deposits erode in value over time, and it hurts those trying to borrow at lower fixed interest rates.
Inflation often starts with a supply shock, such as a natural disaster or an oil price spike, which reduces overall availability of goods. The resulting shortages can lead to a “cost-push” inflation where prices for items that are essential in households or important for trade (such as fuel and food) increase rapidly. Inflation can also be caused by demand-pull, when a shortage pushes up prices for consumer goods that are less essential, or by fiscal policy, which increases demand for goods and services.
The COVID-19 pandemic in 2020 led to widespread lockdowns, which impeded production and travel while also damaging global supply chains. This led to a sharp surge in prices that lasted into 2021-2022. Many economists have attributed the inflation surge to a combination of factors including supply chain disruption, pent-up consumer demand, and economic stimulus from the government and central banks in response to the pandemic.
But it is hard to discern the specific causes of a surge from different perspectives at the same time, and one perspective does not exclude another. That’s why it is best to view the inflation surge as the result of a series of compromises and trade-offs between firms, consumers, governments, and central banks.