THE MAIN FACTORS OF COVID-LINKED AND WAR-RELATED INFLATION
Abstract
High inflation has become again a feature of the global economic landscape like it was in the 1970s. Now, after the ‘lowflation’ of 2012–2019, it has reached the highest level in decades as a consequence of the COVID-19 pandemic and the war in Europe. The main goal of the article is to analyze and to systematize the basic determinants that impact growth in prices in the advanced countries during the last two years. Review of the existing approaches to the analysis of COVID-linked inflation reviled that many economists have demonstrated that the real inflation is even higher than the official indicators suggest. In this study we investigate the previous recession caused by the coronavirus pandemic (exogenous non-economic shock). The factors of COVID-linked inflation are grouped as determinants of aggregate demand and aggregate supply. It is noted that among all the determinants, global supply chain disruptions played a significant role promoting price level growth. The inflation, caused by the semiconductor chip shortages, has been rightly named “chip inflation”, similar to the oil-inflation in the 1970s. The war in Ukraine and the sanctions against the aggressor created additional factors that accelerated the inflation. This study found that they had the same effect – an adverse supply shock – that only added to the upward pressure on the price growth rate. Ukraine and Russia are the world’s largest exporters of many commodities. The war and sanctions have sharply curbed supply of those commodities on the global markets and have contributed to the greatest rise in energy and food prices. Other pro-inflationary factors of the war are increase of military spending and humanitarian assistance for refugees. Both create an additional burden for the government budget. The war-related recession and inflation are similar to the COVID-linked ones. Among all factors considered, the supply-chain crisis should be identified as the main one. This means a long-term inflationary effect and global consequences because repairing broken supply chains as well as forming new ones will take a long time with consequences reaching far outside of the fighting countries.
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