The Drivers of Inflation Dynamics during the Pandemic: (Early) Evidence from Disaggregated Consumption Data

What explains inflation dynamics during the COVID-19 pandemic? This brief focuses on the relative roles of demand and supply factors. Prices and quantities of consumed goods and services are positively correlated following demand changes and negatively correlated in response to supply disturbances. Employing disaggregated indexes from personal consumption expenditures data, this brief documents a positive relationship between prices and quantities during the early stages of the pandemic, followed by a negative relationship in the later period. Thus, while the short deflation episode in March and April 2020 and the following offsetting inflation could be explained by the large fluctuation in demand triggered by the lockdown, the recently elevated inflation readings are likely due to insufficient supply, as global supply chains continue to experience pandemic-related disruptions and many employees are reluctant to return to in-person work until the threat of COVID-19 subsides. The disproportionate influence on April 2021 inflation of consumption categories such as accommodations, public transportation, and used motor vehicles also points to the likely transitory nature of recent inflation. While emphasizing supply factors, this study focuses on a relatively short period, exploiting disaggregated monthly indexes, which are typically volatile. As the recovery still depends on the course of the pandemic, globally as well as domestically, observing inflation over a longer period should deliver a more nuanced picture of inflation dynamics during this episode.