The Sources of the Recent Inflation Surge

The article examines the inflation surge of 2021–2023, which was unusually rapid across advanced economies and driven by both demand- and supply-side shocks. These included pandemic-related fiscal and monetary stimulus, pent-up consumption demand, and sharp increases in energy prices following Russia’s invasion of Ukraine.

According to the analysis, supply shocks—particularly in energy markets—explained a significant part of the price increases. However, the broader literature also emphasizes the substantial role of demand factors, especially in the United States, where fiscal support and strong consumption contributed more strongly to inflationary pressures.

Monetary policy is generally effective in addressing demand-driven inflation, but has more limited and delayed effects on supply-driven shocks, which makes distinguishing between the two crucial for policy evaluation.

Overall, recent inflation is interpreted as the result of a combination of both demand and supply factors. For policy decisions, it is essential to understand their relative importance across different economies, including Finland. (AI translation)

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