How did economists apportion the roles of stimulus versus supply shocks in driving 2021–22 inflation?
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Executive summary
Economists split the blame for the 2021–22 inflation surge between two forces: acute supply-side shocks (shipping bottlenecks, input shortages, energy price spikes) that pushed up prices early and unevenly across sectors, and unusually large fiscal and monetary stimulus that amplified demand—especially for goods—soaked up limited supplies, and contributed materially to overall inflation; different models and samples place the split anywhere from supply-dominant to demand-accounting-for-most, with many high-profile studies assigning roughly one-third-to-two-thirds shares to demand versus supply depending on timing and measurement [1] [2] [3].
1. Supply shocks launched the surge and were plainly dominant in many sectoral readings
Research focused on logistics, input costs, and industry-level bottlenecks finds that supply frictions explain a large fraction of the 2021 price run-up: Brookings’ work using delivery times and expanded supply-chain indicators calculates that supply-chain variables accounted for roughly 58% (delivery times only) to as much as 79% (expanded indicators) of year‑over‑year inflation in Q4 2021, and supply pressures remained important into 2022 in goods-intensive categories [1]; the New York and Richmond Fed accounts similarly stress production and shipping bottlenecks and higher input prices as key drivers of the early inflationary impulse [4] [3].
2. Stimulus and demand explain a large portion in macro decompositions, especially for aggregate inflation
Macro-model decompositions emphasize a big role for demand shocks: a New York Fed calibration finds aggregate demand shocks explain roughly two‑thirds of their model‑based inflation over Dec 2019–June 2022 and attributes “half or more” of that aggregate‑demand effect to fiscal stimulus [2], while cross‑country Fed analysis concludes fiscal support boosted goods consumption without expanding production—thereby creating excess demand pressures and contributing to price tensions [5]. Several other studies, including St. Louis Fed work cited in popular press, translate that into sizeable point estimates—about 2.6 percentage points of the February 2022 U.S. 12‑month inflation rate are linked to stimulus in one study [6] [7].
3. Timing matters: supply early, demand later—many papers stress a shifting balance
A recurring theme across financial‑market and VAR‑based analyses is that supply bottlenecks were the immediate cause of elevated inflation in 2021, while demand and policy-related factors became relatively more important from mid‑to‑late‑2022 onward [8] [9]. That chronology reconciles otherwise divergent claims: if supply constraints are the trigger but stimulus keeps aggregate spending high while production is still impaired, the combined effect magnifies and prolongs inflation; conversely, as bottlenecks eased in late 2022 and 2023, residual demand pressures (including lagged stimulus and monetary policy stance) shaped the disinflation path [4] [8].
4. Methodology and data choices drive wildly different apportionments
The headline split between “stimulus” and “supply” is very sensitive to model choice, variable construction, and sample timing: supply‑focused measures (delivery times, margins, input prices) yield large supply shares [1], while macro fiscal‑VARs and calibrated DSGE models can put two‑thirds weight on demand and pin a substantial share of that to fiscal stimulus [2]. Authors also differ on whether to treat government spending as a demand shock or a shock that behaves more like supply in some specifications, an ambiguity noted in CEPR/VOXEU discussions [10].
5. Consensus, disagreements, and what remains uncertain
There is no single settled number: a broad consensus among central‑bank researchers and several major studies is that both forces mattered substantively—supply shocks were crucial early and in specific sectors, and fiscal/monetary stimulus amplified aggregate demand and therefore overall inflation—but exact apportionments range from supply‑dominant (many sectoral and market‑based studies) to demand‑heavy (some macro decompositions attributing much of demand to fiscal stimulus) depending on model and timing [1] [2] [3] [9]. These differences reflect methodological choices and the fact that global events (e.g., the Russia‑Ukraine war, energy shocks) and policy mix evolved during 2021–22; sources differ and the literature continues to refine the estimates [4] [9].