The fading of the inflation tsunami: Causes and outlooks

The early 2020s saw a series of long-unseen shocks in rapid succession that caught us off guard (the Covid-19 pandemic, the energy and security crises related to Russia's attack on Ukraine). They resulted in an unprecedented surge in prices. On the supply side, the main causes of this surge include problems in global supply chains and massive increases and subsequent volatility in energy and commodity prices. Price increases were also stimulated by the demand side of the economy due to the shift in demand from non-tradables (part of the closed services sector) to tradables (electronics, for example). Demand stimuli were supported not only by a generous and relatively broad-based expansionary fiscal policy, but also loose monetary policy. Firms passed the price shock on to their customers in the form of higher prices and consumer sentiment deteriorated due to high inflation. This article sets out to give a brief summary of the factors underlying the unusually strong surge in inflation and, using the available data on firms' pricing behaviour, demonstrate that the subsiding wave of inflation should really be a thing of the past unless another external shock hits in the near future.