Central Banks and Beyond: An Examination of the Factors Behind the Current Inflation Spike

Abstract

This article examines the factors that have contributed to the rise of inflation rates in developed economies since 2021, with a particular focus on the role of central banks. The main argument is that the unprecedented monetary and fiscal stimulus implemented by central banks and governments in response to the Covid-19 pandemic has been the primary, but not the sole, cause of the current inflation spike. To support this argument, the article proceeds as follows. First, it provides a conceptual and operational definition of inflation and reviews the main price indexes that are used to measure it. Second, it presents descriptive statistics on the average level and volatility of inflation in G7 countries over the last thirty years, highlighting the exceptional nature of the recent period. Third, it discusses four potential explanations for the current inflation episode: the expansionary monetary and fiscal policies in 2020-21, the supply chain disruptions caused by the pandemic and other shocks, the geopolitical tensions between Russia and Ukraine, and the structural changes in the global economy.