The Return of Inflation

Inflation, after an extended absence, is back. Its resumption reflects a combination of supply and demand factors: supply-side disruptions to trade and production associated with COVID-19; and shifts in the composition of demand to goods from services, along with strong stimulus to spending owing to support payment provided by governments. There is disagreement about what to do in response: whether central banks should continue to respond with increases in interest rates, and whether there is a role for selective wage and price controls. Above all, there is disagreement about how long the inflation problem is likely to persist.