Inflation: Driven by Demand or Supply? Are Price Pressures Transitory or Persistent?
The impact of COVID-19 has made it difficult to determine whether inflation is mainly driven by demand or supply. The pandemic caused significant disruptions to both demand and supply, with lockdowns slowing consumption while unprecedented fiscal stimulus measures supported household incomes. Global supply chains were disrupted, labor markets tightened, and uncertainty increased significantly. The geopolitical tensions further complicated the outlook, keeping these questions at the forefront of the policy debate.
A recent study by Mouabbi, Renne, and Tschopp (2025) analyzes surveys conducted among professional forecasters to evaluate the risks facing inflation and growth jointly. The methodology used in the study distinguishes between demand and supply determinants, tracking the fears of a stagflation episode.
Professional forecasters’ surveys gather economists’ predictions on future economic conditions, including inflation and GDP growth, with a proven track record of predictive accuracy. These surveys provide valuable insights for policymakers, especially during times of high uncertainty when the economy faces significant shocks.
Using a dynamic factor model, the study examines the behavior of inflation and real activity in the United States. By combining actual data and survey-based expectations, the model captures informed agents’ perceptions of macroeconomic risks. This approach helps differentiate demand-related forces from supply-related ones and tracks the evolving risks across the entire distribution of future inflation and GDP growth.
By identifying demand and supply determinants through economic principles, the study sheds light on the factors shaping prices and production. It assesses the risks associated with extreme events, offering relevant information for further analysis.
Analyzing quarterly data from the United States covering the period from 1981 to 2024, including key economic events like the Volcker disinflation, the Great Recession, and COVID-19, the study shows that the economy’s driving factors have evolved significantly over time. The study confirms that the recent inflation surge post-pandemic is due to temporary disruptions in supply, with underlying inflation trends pointing towards sustained demand forces. The study also highlights macroeconomic risks during different periods, emphasizing the importance of inflation uncertainty and asymmetric effects on GDP growth.
The study’s findings provide a new perspective on inflation and growth risks, offering valuable insights into the complex interplay between demand and supply factors shaping the economy.
