QED 113: Inflation was supply driven
As you may recall, on March 29, 2020 , when the world was worried about deflation, I explained why the pandemic, if managed as the ECB would have managed it, could instead lead to supply-side inflation. The crux of the argument was this:
and my thesis was that to avoid supply-side inflation the ECB should have anticipated it with a monetary stimulus that would avoid the destruction of productive capacity. But, as we know, in the European mysticism the destruction of productive capacity is always seen as something positive, because it is assumed that the activities that are terminated are precisely the least productive, which would contribute (it is argued) to an increase in the average level of productivity (cutting the lower tail of the distribution). It was therefore decided to let the recession do the dirty work, and in general a line of management of the pandemic was chosen based on closures and reopenings whose rationality is contested by some illustrious epidemiologists, but whose consequences are rather obvious (and go in the direction I indicated to you ex ante ).
In fact, unless you subscribe to the #hastatoPutin vulgate, denied by data that place the peaks of the increases in the price of raw materials well before the outbreak of the conflict in Ukraine and on the occasion of the "reopening" of the major economic routes:
(the source is the usual Pink Sheet ), I think you can easily recognize that, although the contribution of the conflict in Ukraine is visible and significant (which is itself a supply shock), the highest peaks of the price increase were prior and caused, as those who follow those markets remember, by bottlenecks on the supply side in the face of an increase in demand that in some cases expressed a physiological rebound, and in others was drugged by very expansive measures (Superbonus) but in some ways posthumous.
Today Heimberger and others point out this article :
which, for a change, tells us five years later what we knew five years before ( remember anyone? ).
The article is very technical and very well done, it will be a pleasure to read it calmly, but we can draw a conclusion right now: if inflationary tensions did not depend mainly on the overheating of the macroeconomic climate, but rather on bottlenecks and shocks on the supply side, then the strategy adopted to combat them by raising interest rates to cool an economy that was not overheated was (and is) radically ineffective and harmful. The "independent central banks" confirm themselves as the greatest obstacle on the path to rationality and therefore to economic progress, simply because their independence is not conceived so that they operate to pursue a hypothetical general interest (this would be a political task, to be entrusted to political bodies), but the exclusive interest of the financial industry, which does not always coincide (being short-sighted) with the general one.
And we have said this and continue to repeat it, from today relying on the authority of Gourinchas and his co-authors (who do not reach these conclusions, however, but lay the foundations for those who wish to do so to arrive there). It is a pleasure to be in such good and timely company.
See you later in class…
This is a machine translation of a post (in Italian) written by Alberto Bagnai and published on Goofynomics at the URL https://goofynomics.blogspot.com/2025/06/qed-113-linflazione-era-da-offerta.html on Mon, 23 Jun 2025 11:57:00 +0000. Some rights reserved under CC BY-NC-ND 3.0 license.