Post-covid inflation was predominantly driven by unexpectedly strong demand forces---both in the United States and in the Euro Area.
Post-covid inflation was predominantly driven by unexpectedly strong demand forces---both in the United States and in the Euro Area. We establish this result using a sequence of structural VARs with progressively richer specifications, interpret it through the lens of standard AD-AS analysis and an estimated DSGE model, and provide independent support for this conclusion using survey forecasts and real-time data. These demand forces reflected a combination of surprisingly robust pent-up demand following the pandemic restrictions, stronger-than-expected expansionary fiscal policies, and an unusually accommodative monetary stance. Together, they mitigated the recessionary effects of adverse supply shocks and supported the recovery, albeit at the cost of higher inflation. The economic intuition is simple: When a central bank responds forcefully to inflationary pressures, as the Fed and the ECB have done in recent decades, the aggregate demand curve is relatively flat, so supply disturbances move real activity much more than inflation. A large inflation surge, therefore, requires a shift or rotation of the aggregate demand curve. Prepared for the fall 2026 conference of the Brookings Papers on Economic Activity. This paper builds on a manuscript titled “The drivers of post-pandemic inflation,” originally written for the 2024 edition of the ECB Forum on Central Banking. We are particularly grateful to Gauti Eggertsson, Karel Mertens, and Jón Steinsson for their suggestions and feedback. We also thank Carlo Altavilla, Giacomo Carboni, Efrem Castelnuovo, Jacopo Cimadomo, Chris Erceg, Pierre-Olivier Gourinchas, Davide Furceri, Philipp Hartmann, Kamil Koval, Michele Lenza, Matteo Luciani, Alberto Musso, Fernanda Nechio, Mario Porqueddu, Massimo Rostagno, Jirka Slacalek, Antonio Spilimbergo and participants at the BPEA fall 2026 conference for helpful comments and discussions, and Aaron Amburgey for outstanding research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. In addition toworking papers, the NBER disseminates affiliates’ latest findings through a range of free periodicals—theNBER Reporter, theNBER Digest, theBulletin on Health, theBulletin on the Economics of Alzheimer's, and theBulletin on Entrepreneurship—as well asresearch spotlights, lectures, and panel videos.