A new academic study has settled a years-long dispute over what caused the worst inflation in four decades: it was government spending and easy money, not broken supply chains.
Economists Domenico Giannone of Johns Hopkins University and Giorgio Primiceri of Northwestern University, in a new National Bureau of Economic Research working paper, found that demand forces drove roughly 90 percent of the excess inflation seen in the United States and Europe after the pandemic. Supply shocks accounted for only the remaining 10 percent. An alternative model they tested still attributed about three-quarters of the surge to demand.
“Post-covid inflation was predominantly driven by unexpectedly strong demand forces,” the economists wrote. They point to “a combination of surprisingly robust pent-up demand following the pandemic restrictions, stronger-than-expected expansionary fiscal policies, and an unusually accommodative monetary stance.”
That demand was fed by the Biden administration’s deficit spending — nearly $2 trillion in additional spending poured into an economy already recovering rapidly from lockdowns — and by the Federal Reserve under Chairman Jerome Powell, which kept interest rates near zero through March 2022 even as inflation became impossible to ignore.
The researchers note that even the supply-chain bottlenecks widely blamed for inflation were themselves largely a product of excessive demand. American ports were overwhelmed not because of some external breakdown, but because consumers and businesses had unusual amounts of cash to spend, much of it supplied directly by Washington.
A Different Story for Years
That is not what Americans were told at the time. “The inflation has everything to do with the supply chain,” President Biden said at a January 2022 news conference. The Federal Reserve insisted for months that inflation was “transitory,” blaming temporary supply disruptions.
The New York Times pushed the same line repeatedly. A January 12, 2022 headline read: “Supply chain snags continued to drive up prices in December,” published as inflation ran at 7 percent. Later that month, reporters Ana Swanson and Jeanna Smialek wrote that “Americans found themselves with a lot of money in the bank, and as they spent that money on goods, demand collided with a global supply chain that was too fragile to catch up.”
Columnist Paul Krugman went further, dismissing warnings from Larry Summers and Olivier Blanchard that the American Rescue Plan was overstimulating the economy. “A smaller Biden spending plan wouldn’t have made much difference,” Krugman wrote in November 2021. When inflation didn’t subside as he predicted, Krugman later blamed a shrunken labor supply from the “Great Resignation” instead — still sparing government spending from blame.
In September 2021, the Times even suggested worldwide inflation might be “good news,” reasoning that its global reach pointed to temporary pandemic disruptions rather than national policy mistakes.
When contrary evidence did surface, it got buried. In August 2022, the Times reported research from the New York Fed, the University of Maryland and Harvard finding demand responsible for 60 percent of inflation versus 40 percent for supply shocks — yet the article still led with supply-chain bottlenecks and labor shortages before acknowledging demand’s larger role.
Some Saw It Coming
Not every establishment economist bought the supply-chain story. Harvard’s Jason Furman, former IMF chief economist Olivier Blanchard, and former Treasury Secretary Larry Summers all warned early that stimulus was overheating the economy. Former Obama Treasury official Steven Rattner wrote a February 2022 Times column headlined “Biden Keeps Blaming the Supply Chain for Inflation. That’s Dishonest.”
Still, the narrative persisted. Just last month, Bloomberg News founding editor Matthew Winkler attributed Biden-era price increases to pandemic-disrupted supply chains while praising Biden’s fiscal stimulus as an achievement.
The consequences of the mistaken diagnosis went beyond bad headlines. Because inflation was blamed on bottlenecks rather than excess demand, the Fed saw little reason to tighten policy quickly, and the Biden administration had a ready excuse to deflect responsibility for its spending.
Five years on, the new research puts a number on what critics of Biden-era spending argued from the start: the inflation crisis was driven overwhelmingly by government spending and loose monetary policy, not supply chains.
