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Inflation Q&A

At a time of heightened interest in inflation among people, businesses, and communities, the Center for Inflation Research is committed to providing timely answers to timely questions.

The goal of the Center has always been to improve the understanding of policymakers, researchers, and the public about inflation and the factors that influence its behavior. Achieving that goal is especially important in times like these. Bookmark this page or subscribe below to be alerted each time we publish these regular Q&As.

Last updated May 31, 2022

Where is the inflation surge coming from?

As the COVID-19 pandemic moved into its second year, a steady and dramatic increase in inflation started in spring 2021. The factors causing the surge reflect the interaction of demand- and supply-side effects on inflation.

Following the economic downturn caused by the pandemic in 2020, aggregate demand has grown at a robust pace in part because of a combination of pent-up demand and elevated savings built up during the pandemic, alongside fiscal support and accommodative monetary policy aimed at preventing a severe recession. The pandemic also caused a dramatic change in spending patterns, with consumer spending shifting toward goods (such as electronics, household furnishings, and apparel) and away from services (such as airline travel, hotels, and restaurants). In addition, supply chain disruptions and bottlenecks emerged and intensified in the goods sector, with the shortage of semiconductors and its impact on the auto industry serving as a primary example.

To gain a better understanding of how these developments have impacted inflation over the past year, we can separate inflation measured by the consumer price index (CPI) into goods inflation and services inflation. Since 2021, goods have a weight of about 39 percent in the CPI, while services have a weight of around 61 percent. The robust demand for goods coupled with constrained supply has resulted in a dramatic increase in goods inflation, as shown in the chart above, which has driven the pickup in inflation.

This episode is quite different from the 2012–2020 period, when goods inflation was always running below headline CPI inflation and goods prices were often falling. It should also be pointed out that inflation has also picked up among services prices, reflecting strong demand and supply challenges in some parts of that sector as well. So, while goods prices have led this inflationary surge, they are not the entire story.

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About the Researchers

Senior Vice President and Associate Research Director
Senior Economic and Policy Advisor

The views expressed herein are those of the authors and are based on information available at the time of the last update and do not necessarily reflect the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.