Supply chain bottlenecks and labor shortages have been a major factor driving inflation in the U.S., though surging consumer demand ultimately did more to drive up prices in the last two years, according to researchers at the Federal Reserve Bank of New York, the University of Maryland and Harvard University, the New York Times reported. In a blog post on Wednesday, Julian di Giovanni, the head of climate risk studies in the New York Fed’s Research and Statistics Group, summarized findings from a paper presented in June that found higher consumer demand for all types of products during the pandemic was responsible for roughly 60 percent of the inflation in the United States between 2019 and 2021. Supply shocks — which include shortages of workers, raw materials and shipping containers needed to produce and move goods globally — accounted for the remaining 40 percent of inflation in the model, with 58 of 66 industrial sectors that the research identified experiencing supply constraints. The researchers concluded that, without supply bottlenecks, inflation in the United States would have been 6 percent at the end of 2021, instead of 9 percent. The research finds that demand shocks played a larger role in explaining inflation in the United States, whereas supply chain bottlenecks have done more to fuel inflation in Europe. “The bottom line of this decomposition is that supply constraints magnified the impact of higher demand in inflation,” Mr. di Giovanni wrote. The findings provide one answer to a debate that policymakers and politicians have been wrestling with about the nature of inflation, which slowed slightly to 8.5 percent in July. While many economists point to the government’s generous spending to support Americans during the pandemic as a key factor fueling inflation, the Biden administration has often blamed global supply chain issues and rising fuel prices stemming from the Russian invasion of Ukraine. The debate has important implications for the actions policymakers can take to fight price increases. The Federal Reserve has aggressively raised interest rates to try to cool consumer demand and the economy, but it has no tools to alleviate supply constraints.
