Important Lessons from the 2021–24 Inflation Surge
Demand, not supply, drove the post-pandemic price spike
Policymakers and economists alike are often quick to forget valuable economic lessons — or worse, to distort them in real time, even in the face of overwhelming evidence. One such likely lesson can be gleaned from the epochal surge in inflation that occurred between 2021 and 2024. Over that period, from January 2021 and January 2025, the cumulative increase in the price level reached 21.5%.
However, it wasn’t entirely unforeseen: In early 2021, especially around the time of the enacting of the American Rescue Plan Act (ARPA), some economists did warn that inflation was a real risk. For example, former National Economic Council economist Lawrence Summers wrote in February 2021:
“Macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability…there is the risk of inflation expectations rising sharply. Stimulus measures of the magnitude contemplated are steps into the unknown.”
A few months later, former Council of Economic Advisers economist Jason Furman noted that the ARPA was “definitely too big for the moment.” The ARPA added $1.9 trillion in stimulus spending — heavily front loaded —on top of existing spending levels. This came after the $915 billion Consolidated Appropriations Act, the $1.9 trillion CARES Act, and the $225 billion and $355 billion Families First Act and PPPHCE stimulus. In sum, more than $3.4 trillion had been disbursed in the 12 months leading up to the enactment of the ARPA — a monetary helicopter drop of historic proportions.
Despite the warnings, policymakers doubled down by enacting another $1.9 trillion in stimulus through the ARPA. And herein lies the lesson. At the time, the estimated output gap for the remainder of 2021 was just $380 billion. In other words, the ARPA stimulus was two to three times larger than what was needed to close the output gap. This explains why economic output eventually overshot its pre-pandemic trend, overheating the economy and creating the highest inflation surge in over four decades.
A Look Back at the Literature
In the immediate aftermath of the pandemic, as inflation began climbing month after month in 2021, conventional wisdom was quick to settle on an explanation: It was temporary. It was the result of clogged ports, empty factories, and a few container ships idling off the coast of Los Angeles. If policymakers were at fault, it was only for underestimating the fragility of global supply chains. “Transitory” became a kind of rhetorical shield, acknowledging the discomfort of rising prices without assigning real responsibility.
As more data became available and as researchers dug deeper into the timeline and mechanics of the inflation surge, the narrative shifted —or rather, it sharpened. The surge in prices was not primarily driven by snarled supply chains or external shocks. It was a story of overheating demand pushing beyond the economy’s productive capacity. And central to that overheating was the sheer scale and timing of fiscal stimulus, especially the ARPA.
Economists at the Federal Reserve, IMF, NBER, and other institutions have now reached a broad consensus: Demand, not supply, was the dominant driver of U.S. inflation during the pandemic era. A 2024 paper by Kristin Forbes, Jongrim Ha, and M. Ayhan Kose at the Centre for Economic Policy Research finds that nearly 60 percent of the inflation spike between 2020 and 2023 was driven by demand-side forces, including monetary accommodation. Supply shocks, while real, accounted for the remaining 40 percent. A similar study by IMF researchers Melih Firat and Otso Hao puts the split at roughly 50/50 — still a far cry from the “it’s just the supply chain” explanations that once dominated headlines.
But these decompositions only scratch the surface. The most compelling work doesn’t just show that demand mattered, it shows where that demand came from. Again and again, the answer points to fiscal policy. More specifically, the ARPA, passed in March 2021 after the economy had already rebounded, injected an additional $1.9 trillion into an economy already running hot.
Economists Francesco Bianchi, Renato Faccini, and Leonardo Melosi, writing in the Quarterly Journal of Economics, estimate that ARPA alone raised peak inflation by over three percentage points, pushing it from 5.5% to 8.6%. They argue that the inflationary impact of this stimulus was not just large but persistent, and that because it was unfunded, it would continue to exert upward pressure on prices well into 2025.
Chris Murphy’s 2023 paper in Economic Papers tells a similar story. He finds that by Q4 2022, inflation was 4.2 percentage points above baseline, with 2.4 of those points directly attributable to expansionary fiscal policy and another 0.6 points resulting from monetary easing.
A 2022 paper by Francesco Bianchi and Leonardo Melosi for the Federal Reserve Bank of Chicago shows that roughly half of excess inflation in Q4 2021 can be directly traced to fiscal stimulus, with the U.S. showing a more pronounced effect than any other major economy. A Federal Reserve Bank of St. Luis study led by François de Soyres confirms these findings in a 2023 update, noting that fiscal stimulus accounted for 2.6 percentage points of excess inflation, up from 2.5 in their earlier analysis.
William Cline, writing in Economics International, estimates that pandemic-related fiscal relief contributed between one-third and two-thirds of the overall inflationary price surge, depending on the assumptions used.
Even cross-country studies reinforce the uniquely American nature of the inflation spike. A 2025 NBER paper by Robert J. Barro and Francesco Bianchi uses a “fiscal dominance” framework to analyze inflation across 37 OECD countries. Their model, based on the idea that inflation can arise when governments fund spending through money creation or implicit debt monetization, finds that the U.S. fits the theory almost perfectly. In their sample, roughly 80 percent of effective fiscal financing came from inflation, not from increased taxes or future spending restraint.
A separate NBER paper published in 2024 comes to a similar conclusion. The authors write: “Post-COVID inflation was predominantly driven by unexpectedly strong demand forces, not only in the United States, but also in the Euro Area. In comparison, the inflationary impact of adverse supply shocks was less pronounced.”
This body of work doesn’t dismiss supply shocks outright. Supply chains were tangled, chips were scarce, and the war in Ukraine did rattle commodity markets. But those shocks alone can’t explain why U.S. inflation ran hotter than in peer countries — or why it persisted even as global logistics normalized.
In fact, multiple studies emphasize this point. An IMF working paper from 2022 finds that more than half of the increase in producer prices was driven by demand-side forces, not supply bottlenecks. A 2023 NBER paper by Julian di Giovanni and others similarly attributes two-thirds of the deviation in the consumer price index (CPI) trend to demand factors, sectoral supply factors still explain the remaining third.
Today, the data is in. The fog of “transitory” inflation has lifted, and the literature tells a coherent story: The U.S. had an overheating problem, and it was self-inflicted. The American Rescue Plan didn’t merely soften the landing from COVID, it inadvertently lit the fuse on the largest inflation surge in four decades.
What About the Populist “Greedflation” Argument?
As inflation surged and households felt the pinch, politicians and pundits floated a new culprit: corporate greed. The idea was that companies, emboldened by supply disruptions and opaque pricing, seized the opportunity to pad their profit margins. They called it “greedflation”: the notion that price hikes weren’t just a reaction to rising costs or demand, but deliberate profit grabs by corporations exploiting inflation itself.
One paper that’s done more than any other to popularize this idea is Isabella Weber’s and her colleagues’ 2024 study, “Implicit Coordination in Sellers’ Inflation.” Frequently cited in media and political circles, the paper argues that broad cost shocks, such as spikes in commodity or input prices, enable firms to raise prices in a “coordinated” way, boosting profit margins under the cover of inflation.
Her evidence? Corporate earnings call transcripts, analyzed for positive sentiment during periods of rising costs. Weber interprets this optimism as evidence that companies view cost shocks as an opportunity to increase prices without fear of competitive retaliation.
But this narrative stretches far beyond what the data can support. In competitive markets, firms that raise prices too aggressively risk losing market share to rivals or new entrants. Even in concentrated industries — airlines, for instance — companies routinely undercut each other when demand softens. The idea that corporate America can simply “coordinate” price hikes through vibes on earnings calls misunderstands both market dynamics and the disciplining force of consumer behavior.
More fundamentally, Weber’s paper commits a deeper macroeconomic error: It fails to distinguish between supply-driven cost shocks and demand-driven price pressures. Rising input prices don’t occur in a vacuum. When demand is surging, fueled by unprecedented fiscal and monetary stimulus, firms may report both rising costs and growing optimism. But this doesn’t imply collusion; it simply reflects an economy running hot.
Weber’s sentiment index, which tracks how executives “feel” about cost pressures, may just be capturing this macroeconomic heat rather than any covert pricing behavior. Her regressions can't disentangle whether price hikes stem from opportunism or from classic macro stimulus pushing nominal GDP ahead of sticky costs. By interpreting bullish earnings call language as evidence of profiteering, the paper “reasons from a price change,” mistaking downstream symptoms for upstream causes.
Worse still, the policy prescription that flows from this logic — price controls to tamp down future “cost shock inflation” — ignores the long history of rationing, shortages, and economic distortions such measures unleash. If we want to explain persistent, broad-based inflation, we shouldn’t look to corporate motives. We should look to macroeconomic excess. Firms may set prices, but it’s policymakers who set the conditions under which prices can rise.
This theory has been politically useful. It absolved policymakers of responsibility and offers the public a clear villain. But like most convenient narratives, it falters under scrutiny.
Let’s start with the European Union, where the “greedflation” discourse has been particularly loud. A detailed 2025 study by Maximilian Koppenberg, Stefan Wimmer, and Stefan Hirsch analyzes markup behavior across nearly 89,000 firms in the EU’s food and beverage sector — arguably the industry most commonly accused of profiteering. Their findings are straightforward: Median markups fell during the pandemic years, including in 2021 and 2022 when inflation was peaking.
Not only that, but their analysis shows that markups were negatively correlated with agricultural input prices. In other words, firms didn’t pass on higher raw material costs by padding their margins — they absorbed them. And large multinational firms, often cast as the greediest, were the most restrained in this regard. Far from confirming the greedflation narrative, this study flips it on its head.
Similar results come from the Federal Reserve Bank of San Francisco. In a 2024 study Sylvain Leduc, Huiyu Li, and Zheng Liu examine aggregate U.S. markups across industries from 2020 to 2023. When weighted by industry costs, markups were found to be flat over the period. The authors’ conclusion is clear: “Rising markups have not been a main driver of the recent surge in inflation.”
Spain offers a further test case. In their 2025 paper, Jorge Uxó, Eladio Febrero, and Ignacio Álvarez estimate that 85% of price growth in Spain from 2021 to 2023 was due to higher input costs, not profiteering. Only 13% of the increase could be attributed to markups, and even that likely reflects industry-specific dynamics, not a generalized pricing strategy.
Other central banks report similar patterns. The Reserve Bank of Australia’s 2023 analysis of firm-level pricing behavior finds even weaker effects and concludes that just 3.5% of cumulative inflation could be attributed to rising markups. Their bottom line: “The markup mechanism does not seem to be a plausible source of inflation amplification.” Likewise, the Bank of Canada examined firm-level data from 2015 to 2022 and found little evidence that markups rose in response to inflationary pressures. On the contrary, their 2023 study emphasizes the stability of markups, even in sectors facing steep cost increases.
Perhaps most damning for the greedflation thesis is a 2023 study by Federal Reserve Bank of Kansas City that actually defends higher markups as rational. The authors argue that markup increases, where observed, are likely a forward-looking response to anticipated cost increases — a sign of caution, not profiteering. Businesses raise prices in anticipation of rising input costs, not because they suddenly became greedier.
The timeline itself also undermines the idea that firms’ greed intensified in 2021. As Tomás Baioni shows in a 2023 study of the Italian economy, causality appears to run from inflation to markups, not the other way around. Inflation rises first; markups respond later, often modestly. Where there is an effect, it's usually weak or even negative. Finally, a 2025 study by Santiago Álvarez and others maps pricing behavior along the entire supply chain and finds that consumer-facing markups remained stable from 2019 to 2023. Retail prices did rise, yes, but in near lockstep with input costs.
In sum, the case for greedflation is intellectually thin. It’s based on cherry-picked anecdotes, correlation errors, and populist impulse.
Inflation is Rooted in Washington
The inflation surge of 2021–24 was no bolt from the blue. It was the predictable consequence of extraordinary macroeconomic stimulus applied at the wrong time and in excessive magnitude. While supply shocks, clogged ports, chip shortages, energy disruptions, and a war in Europe undoubtedly added volatility and complexity to the price environment, the weight of the evidence shows they were not the primary drivers of sustained inflation. They explain relative price shifts and temporary spikes, not a broad, persistent increase in the general price level.
What sustained inflation required was excess demand, and that demand came from Washington. When policymakers injected trillions into an economy already well into recovery — overshooting the output gap by a factor of three — they lit the fuse. The American Rescue Plan wasn’t merely too large or too fast; it arrived after GDP had already returned to trend and the labor market was tightening. Monetary policy, too, remained accommodative for too long. Together, they created the perfect environment for overheating.
In this context, blaming corporations for doing what they always do—set prices in response to costs and demand—is a political diversion. “Greedflation” has proven to be a hollow theory, unsupported by the data and contradicted by international experience. Markups remained stable in most sectors, and where they did rise, it was often a forward-looking hedge against rising input costs, not collusion. Greed is a constant; what changed was the macroeconomic backdrop.
If there’s a lesson here, it’s that inflation doesn’t require exotic explanations. It can still be caused by printing and spending too much money, too fast. Supply chains can fray, wars can disrupt, and oil prices can spike — but persistent inflation only emerges when those shocks hit an economy already primed to overheat. The responsibility for that overheating lies in Washington. And if we fail to learn that lesson, we shouldn’t be surprised when history repeats itself.