Inflation is a Supply Phenomenon

A sine qua non condition for inflation bursts is supply deficiency—caused either by exogenous shocks to aggregate supply (supply disruptions), or by excessive aggregate demand (supply-constrained demand booms). Aggregate demand booms, even big ones, that do not trigger supply deficiencies, are not inflationary. We survey the literature on the topic and discuss the evidence. Absent glaring macroeconomic mismanagement, we argue that viewing supply issues as the root cause for inflationary episodes provides an accurate account of when and where inflation occurs. Supply deficiencies typically lead to high, but ultimately moderate, inflation rates.