In recent months, inflation hawks have argued that inflation has been driven largely by excessive aggregate demand. This argument implies that Joe Biden’s March 2021 American Rescue Plan was too big, that the Federal Reserve should have started raising interest rates earlier, and—perhaps—that the Fed’s current campaign of aggressive interest rate hikes is justified.

But a recent paper from the Roosevelt Institute says that this is nonsense. The paper is co-authored by Nobel prize-winning economist Joseph Stiglitz and Roosevelt’s Ira Regmi, and it argues that the inflation of the last two years has not been driven by fiscal or monetary stimulus. Rather, they blame the war in Ukraine and the aftershocks of the COVID-19 pandemic.

A reader emailed me to ask what I thought of this paper. In a nutshell, I didn’t find it very persuasive. It’s definitely true that some of the inflation of the last year is due to supply chain disruptions. At a minimum, the war in Ukraine undeniably pushed up energy costs.

Gasoline prices rose by 60 percent between June 2021 and the peak of gasoline prices in June 2022. With gasoline prices accounting for about four percent of the average household’s budget, this meant that gasoline alone contributed something like 2.4 percentage points of the 9.1 percent annual inflation rate for June 2022. Inflation absolutely would not have soared so high last year if the war in Ukraine had not pushed energy prices up so much.

But core inflation—a measure that excludes volatile food and energy prices—was still 5.9 percent in June 2022. That’s way above the Fed’s 2 percent target. So this wasn’t the only factor driving high inflation—or even the main one.

Pandemic-related demand shifts contributed to inflation

I think Stiglitz and Regmi were correct to identify pandemic-related shifts in demand as a significant factor in the inflation of the last two years.

For example, in 2020 people went to fewer exercise classes and bought more exercise bikes. Demand for exercise bikes outstripped available supply, so prices soared. But there wasn’t a symmetrical decline in the prices of gyms and yoga studios. So, averaging across these two categories, prices rose as a result of shifting consumption patterns.

Stiglitz and Regmi argue that dynamics like this were a major factor pushing up prices over the last two years. Another example is in real estate. In 2020, demand collapsed for commercial real estate, especially in ...