Mid-Year Themes

Editor’s Note: This week, we reflect on the biggest stories we’ve covered so far in 2022.

Inflation: Dormant to Dominant

Three years ago, the business press was trumpeting its demise; today, inflation is back with a vengeance. The hand-wringing over how this happened has occupied copious amounts of time in both the private and public sectors. It has also occupied a lot of space in our commentaries during the first half of 2022.

A central contributor to the surge in inflation has been the pandemic, which severely limited the supply side of the world economy. Production chains tangled, workers left the labor force and capacity in many industries was taken out of service for want of demand. Conditions on all three fronts have improved, but still stand at a deficit to pre-COVID levels.

On the demand side, fiscal stimulus enacted to backstop consumers and businesses proved excessive. The accumulation of savings fostered a surge in spending and dulled price consciousness. Saving rates have returned to normal levels, but there remain large pools of unspent funds that support consumption.

Initial indications of resurgent inflation were dismissed as transitory. And indeed, the prices of some items that surged during the early phase of the recovery have leveled off. But as time has passed, the prices of more and more goods and services have increased by outsized amounts. The broadening of inflation suggests systemic, not idiosyncratic root causes.

Analysts (like us) have been calling for inflation to peak several times in the past eighteen months, only to be proven wrong. The war in Ukraine certainly complicated matters; its impact on food and energy prices has been significant.