英国国家经济和社会研究所-欧洲和美国通货膨胀意外的本质

21March2024

THENATUREOFTHE

INFLATIONARYSURPRISEIN

EUROPEANDTHEUSA

PaulaBejaranoCarbó

NationalInstituteofEconomicandSocialResearch

NIESRDiscussionPaperNo.554

AbouttheNationalInstituteofEconomicandSocialResearch

TheNationalInstituteofEconomicandSocialResearchisBritain'slongestestablishedindependentresearchinstitute,foundedin1938.Thevisionofourfounderswastocarryoutresearchtoimproveunderstandingoftheeconomicandsocialforcesthataffectpeople’slives,andthewaysinwhichpolicycanbringaboutchange.Overeightyyearslater,thisremainscentraltoNIESR’sethos.Wecontinuetoapplyourexpertiseinbothquantitativeandqualitativemethodsandourunderstandingofeconomicandsocialissuestocurrentdebatesandtoinfluencepolicy.TheInstituteisindependentofallparty-politicalinterests.

NationalInstituteofEconomicandSocialResearch

2DeanTrenchSt

LondonSW1P3HE

T:+44(0)2072227665

E:

enquiries@niesr.ac.uk

www.niesr.ac.uk

Registeredcharityno.306083

ThispaperwasfirstpublishedinMarch2024inTheEuroin2024,available

here

CompetingInterestStatement:Theviewsexpressedinthispaperarebasedonresearchandarenotattributedtotheorganizationstowhichtheresearchersareaffiliated.Therearenoconflictsofinterest.Theusualdisclaimerapplies.

©NationalInstituteofEconomicandSocialResearch2024

TheNatureoftheInflationarySurprisein

EuropeandtheUSA

PaulaBejaranoCarbó

Abstract

Thispaperleveragesinsightsfromdataandeconomictheoryinordertoconstructanarrativeaccountofhowthenatureofinflationhasevolvedovertimeintheeuroarea,UnitedKingdomandUnitedStatessincetheonsetoftheCovid-19pandemic.Tothisend,Idecomposetherecent‘inflationarysurgeepisode’intofourperiods:TheCovidshockperiod(2020Q1-2020Q2),characterisedbyjointanegativedemandandsupplyshock;theeconomicreopeningperiod(2020Q3-2021Q4),characterisedbyconflictingpositivedemandandnegativesupplyshocks;thepost-reopeningperiod(2022Q1-2023Q1),alsocharacterisedbyconflictingpositivedemandandnegativesupplyshocks,wherethelatterisdrivenbyanexogenousincreaseinenergyprices;andthepost-energyshockperiod(2023Q2-present),characterisedbyfallingconsumerpriceindex(CPI)inflationalongsidestill-elevatedandbroad-basedunderlyinginflationarypressures.Havingestablishedthis‘inflationstory’,IconcludewithsomebriefcommentsontheEuropeanCentralBank,BankofEnglandandFederalReservemonetarypolicy

responsesduringthistime.

Classification:E31,E50,E58,E63

Keywords:Inflation,MonetaryPolicy,CentralBankPolicy,ComparativeAnalysis

Acknowledgments

IwouldliketothankFernandoFernándezMéndezdeAndés,StephenMillardandBarryNaisbittforusefulcommentsandinsightfuldiscussion,fromwhichthispaperhasbenefittedgreatly.Unlessotherwisestated,datainthispapercomefromtheNationalInstituteGlobalEconometricModel(NiGEM)database.Thecut-offdateforNiGEMdatareportedinthischapteristhethird

quarterof2023;thecut-offdateforallotherdataisDecember2023.

1

1.Introduction

InthedecadepriortotheCovid-19pandemic,consumerpriceindex(CPI)inflationintheeuroarea,UnitedKingdomandUnitedStatesaveragedbetween1-2percentwhilecentralbankpolicyrateswere,forthemostpart,closetoorbelowzero.Asaresult,thepolicydebatesinthisdecadeoftencentredaroundthe‘newnormal’ofnear-zerointerestrates.Atthetimeofwriting,inflationhasbeenabovecentralbanks’typical2percenttargetinallthreeeconomiesforovertwoyears,andtheEuropeanCentralBank(ECB),BankofEngland(BoE)andFederalReserve(Fed)haveembarkedonthemostaggressiveglobalmonetarypolicytighteningcyclerecordedintheseindependentcentralbanks’histories.Makingsenseofwhereinflationandmonetarypolicymightbeheadinginthemedium-termfirstlyrequiresacarefulanalysisofthenatureof

theinflationarysurprisethatchangedourpost-pandemiceconomiclandscape.

Thenatureofinflationinthepastthreeyearshasnotbeenhomogeneous,neitherwithineconomiesnorbetweeneconomies.Forinstance,theextenttowhichinflationhasbeendemand-drivenorsupply-drivenhasvariedacrosstimeandspace.Additionally,therehavebeenmultipleinflationarysurprisesinEuropeandtheUSAwithinthelastfouryears.Despitethis,thevariousinflationarysurgesthathavetakenplacesincetheonsetofthepandemichavemarkedasignificantdeparturefromtheprevious‘newnormal’,andsohavenaturallybeencharacterisedasonemonolithicinflationarysurprise.Clarifyinghowthenatureofeachoftheinflationaryperiodsintheeuroarea,theUnitedKingdom,andtheUSAhasevolvedsincetheCovid-19

pandemicisthereforeofcentralimportance.

Thisarticleproceedsasfollows:section2combinesinsightsfromdataandeconomictheorytodescribethepost-Covid‘inflationstory’,beginningwiththeimpactofnationallockdownsandfinishingwiththelatestdataavailableatthetimeofwriting.Withtheobviousbenefitofhindsight,section3usesthestoryestablishedinsection2tobroadlycommentoncentralbanks’

actionsinthispost-Covidinflationaryera.Section4concludes.

2.Thepost-Covidinflationstory

TherehavebeenavarietyofsourcesofeconomicdisruptionthathavestokedinflationarypressuressincetheonsetoftheCovid-19pandemic.Onthedemandside,themaindriversofinflationhavebeengenerousfiscalstimuluspackages,expansionarymonetarypolicy,andshiftsinconsumerpreferences/behaviour.Onthesupply-side,themaindrivershavebeensupplychainbottlenecks,goodsandlabourshortages,andenergyandfoodpriceincreasesfollowing

Russia’sinvasionofUkraine.Ofcourse,‘second-round’inflationaryeffects,suchasincreasesin

2

wagesandprofitsinresponsetoelevatedinflation,mustalsobetakenintoaccount.Understandinghowthenatureofinflationarypressureshaschangedovertimeandaffectedthe

widermacroeconomyiscrucialforassessingthemonetarypolicyresponsetohighinflation.

Tothisend,Idecomposetherecent‘inflationarysurgeepisode’intofourperiods,wherethefirstthreeareasidentifiedviasignrestriction

s1

inthevectorautoregressivemodelinAscarietal.(2023):theCovidshockperiod(2020Q1-2020Q2),characterisedbyajointnegativedemandandsupplyshock;theeconomicreopeningperiod(2020Q3-2021Q4),characterisedbyconflictingpositivedemandandnegativesupplyshocks;thepost-reopeningperiod(2022Q1-2023Q1),whichalsocontainspositivedemandandnegativesupplyshocks,butthelatterisdrivenbyanexogenousincreaseinenergypricesresultingfromtheRussianinvasionofUkraine.Thelatestdataatthetimeofwritingsuggestthatafourthperiodhassincematerialised(2023Q2-present),denotedhereasthepost-energy-shockperiod,characterisedbyfallingCPIinflationalongsidestill-elevatedandbroad-basedunderlyinginflationarypressures.Theeffect

oftheseshockperiodsoncoreCPIinflationandrealGDPcanbeseeninfigure1.

Onecaveattobearinmindisthatthefoundationsforhighinflationwerelaidwellbeforethepandemic.Forexample,accommodativemonetarypoliciessincetheglobalfinancialcrisisalongsidefactorssuchasanincreasedimportanceinglobalcommoditypricesindeterminingdomesticinflationaltogetherfacilitatedthisinflationarysurge(Forbes2019).However,theseconsiderationsexceedthescopeofthisanalysis,whichfocusessolelyondescribingthepost-

Covidinflationstory.

1Signrestrictionscanhelpinformwhetherashockisdemandorsupply-driven:forexample,ifanidentifiedshockhasanegativeeffectonbothoutputandinflationthenthisistypicallyunderstoodasanegativedemandshock,incontrasttoanegativesupplyshockwhichwouldgenerallyinvolveanegativesignonoutputandapositivesignoninflation.

3

Figure1:CoreCPIinflationandrealGDPintheeuroarea,UnitedKingdomandUSA

a)CoreCPIinflationb)RealGDP

Sources:NiGEMdatabase,FRED,ONS,Eurostat,Datastream

Notes:IntheUKandEA,coreCPIinflationreferstoCPIinflationexcludingfood,energy,

alcoholandtobacco.IntheUSA,thecalculationonlyexcludesfoodandenergy.

2.1TheCovidshockperiod(2020Q1-2020Q2)

Theeconomicdisruptioncausedbynationallockdownsoccurringinthefirsthalfof2020wasevidentlyofsecondaryconsequencetothelargelossoflifecausedbytheCovid-19pandemic,butthelockdownsnonethelesshadsignificantimmediateramificationsforeconomicactivityandconsumer/firmbehaviour.Figure2illustrateshowtheimplementationof‘stringent’governmentpolicies,suchasstay-at-homerequirementsandworkplaceclosures,coincided

withasharpdeclineinrealeconomicactivityfromMarch2020onwards.

Thepartialeconomicshutdowninthefirsthalfof2020causedanabruptandsteepfallinrealGDPinallthreeeconomiesandsimultaneouslygenerateddisinflation(Figure1).Ascarietal.(2023)takethejointfallsinGDPandinflationtomeanthat,onaggregate,theeffectsofthedeepnegativedemandshockdominatedthoseofthenegativesupplyshock.Intuitively,thiscanbethoughtofasthedisinflationaryeffectsofnegativepreferenceshocktocontact-intensivegoodsandservices,andthesubsequentoutputconstraintonaffectedsectors,overtakingthe

inflationaryeffectsofacutinthesupplyofthesegoodsandservices.

Guerrierietal.(2022)suggestthatthisCovidshockcanalsobethoughtofasa‘Keynesiansupplyshock,’inwhichanasymmetricandtransitorysupplyshockcaninducealargenegativedemandshock.Theintuitionisasfollows:ashutdownofthecontact-intensiveportionofthe

economy(hence,asymmetric)lowersthepotentialoutputofthissector,whichreducesthe

4

overallsetofgoodsavailabletoconsumersaswellastheneedforlabourinthissector.Thishastwocounteractingcorollaryconsequences:firstly,itbecomeslessattractivetospendoverall,inducingconsumerstodelayspending;andsecondly,itincentivisesareallocationofspendingintotheactivenon-contact-intensivesector.Thedecreasedneedforlabourinthecontact-intensivesectorcausesareductioninitsworkers’incomes,which,pairedwithdelayedspending,canbesufficientlylargetodriveanaggregatedemanddeficitdespitesomereallocationof

spending.So,thistypeofsupplyshockcaninducearecessionanddisinflation.

Ultimately,theCovidshockislikelytohavebeenacombinationofnegativedemandandsupplyshock

s2.

Importantly,thisexplainstheneedforfiscalstimulusinthistime(asaresponsetothesupplyshocktothecontact-intensivesector)andindicatesthatthedemanddeficitwasalwaysgoingtobeastransitoryasthepandemicitself.Bothelementswouldprovetobe

importantdriversofinflationduringtheeconomicreopeningperiod.

Figure2:Covidshockindicators

a)Stringencyindexb)Realactivityindex

Sources:Haleetal.(2023),BrookingsInstitution(2023).

Notes:TheStringencyindex,partofthewiderOxfordCovid-19GovernmentResponseTracker,capturesthedegreetowhichgovernmentpoliciesemployedduringthepandemicwerestringent,includingvariablessuchasstay-at-homerequirementsandworkplaceclosures.100representstheharshest,ormoststringent,degreeofgovernmentactioninresponsetoCovid-19.TheBrookingsrealactivityindexcompiles9indicators,suchasretail

salesandcapacityutilisation.Negativenumbersrepresentcontractionsinrealactivity.

2Severalotherpapersprovidealternative,thoughcomplementary,waysofthinkingoftheCovidshock.See,forinstance,delRio-Chanonaetal.(2020);InoueandTodo(2020);FornaroandWolf(2023).

5

FiscalstimulusduringtheinitialCovidshockperiod-necessarytoprotecthouseholdsandreducetheoveralloutputlossinthistime-wasgenerousinallthreeeconomiesandtargetedsimilarprogram

s3.

Forexample,directgrantstofirmsinaffectedsectors,increasedhealthcarespending,self-employedincomesupportandfurlough/unemploymentbenefitschemeswerecommoninsurancepoliciesimplementedintheUnitedKingdom,USAandacrosseuroareacountriesinthistime.Thatsaid,therewerelargedifferencesincountries’abilitiestoprovidestimulusduringthisperiod.FiscalsupportwasthelargestintheUSArelativetoothercountries,notjustincashterms,butalsointermsofdeviationsfrompre-Covidprojectedspending(deSoyresetal.2023).TheinitialUSAgovernmentfiscalstimulus,viathe$2.2trillionCARESact,wentasfarasprovidinganunconditionalcashtransfertoalltaxpayers.ThiscontraststoSpain,forexample,wherefiscalstimulusoftentooktheformofpublicguaranteeschemes,orcontingentliabilities,resultingfromlimitedfiscalspace(EBA2020).UsingNiGEMdata,Iestimatethatgovernmenttransfersaccountedfor15,57,17,and8percentofgrowthinaggregaterealpersonaldisposableincomeinthesecondquarterof2020intheUnitedKingdom,

USA,GermanyandSpain,respectively.

Thefiscalstimulus,pairedwithinabilitytospendduetolockdownsandincreasedintertemporalsubstitutionledtoanoverallriseinsavings.IntheUnitedKingdom,USA,GermanyandSpain,quarterlygrosshouseholdsavingsasapercentageofpersonaldisposableincomereached27,25,21and13percentin2020Q2,respectively,comparedtotheir1997-2019quarterlyaveragesof8,5,10and4percent.Thatsaid,thepossibleinflationaryeffectofaggregateaugmentedsavingsisdependentonwhoholdsthesesavingsandthereasonwhythey’veincreased.Toexplain:householdsatthelower-endoftheincomedistributionareusuallycreditconstrained,andthereforehavehighmarginalpropensitiestospendwindfallincreasesinincome(whichiswhytargetingfiscalstimulusatthisdemographicisseenasagoodautomaticstabilisationmechanism).Separately,whethersavingshaverisenbecausehouseholdsareforcedtosave(e.g.,becausedesiredservicesectorspendinghasbeenshut-down)orbecauseofa

precautionarymotive(e.g.,fearofexpectedrecession)matters.

Severalpapershavesoughttodecomposepandemic-related‘excess’savings(savingsthatexceededtheirlevelasimpliedbythepre-pandemictrend)bymotivatingforce.EmpiricalmodellingfortheUnitedKingdomandtheeuroareasuggeststhataninabilitytospend,rather

thanprecautionaryorintertemporalsubstitutionmotives,drovetheincreaseinsavingsinthe

3Bayeretal.(2023)estimatethatfiscaltransfersreducedpandemic-relatedoutputlossby2percentagepointsatitstrough.Thoughfiscalsupportmeasureswerebroadlysimilarinthistime,keydifferencesinfiscalpolicyamongcountrieswouldgeneratedivergingmacroeconomicdynamicsbetweenthem,includingdifferencesinthenatureofinflation,asisdescribedinfurtherdetailinthesectionsbelow.

6

secondquarterof2022(See,forinstance:Dey-Chowdhuryetal.,2022;DosscheandZlatanos,2020;AlcidiandShamsfakhr,2022).TurningtotheUSAcontext,researchbytheFedsuggeststhatthebottomquartileoftheincomedistributionheldaround$116billioninexcesssavingsin2022Q2,representinga1,023percentchangeonthequarter(Aladangadyetal.,2022).Thesefindingssuggestthatcredit-constrainedhouseholdsoragentsviewingsavingsas‘forced’representedasignificantportionofholdersoftotalexcesssavings,feedingthepositivedemand

shockthatensuedduringtheeconomicreopeningperiod.

DuringthisinitialCovidshockperiod,monetarypolicywasjustasaccommodativeasfiscalpolicy.Notonlydidcentralbankslooseninterestratesbacktonear-zeroterritory,buttheyalsoconductedquantitativeeasing(QE)atanunprecedentedscale.BetweenMarchandJune2020,theFedbalancesheetexpandedbysome$3trillion,surpassingtheexpansionwitnessedintheaftermathoftheGlobalFinancialCrisis.BoEandECBassetpurchaseannouncementstotalledaround£300billionand€1.8trillion,respectively.ThoughthereissignificantdebateintheliteratureontheoveralleffectivenessofQE,estimatesbyDelgadoandGravelle(2023)suggestthat10-yeargovernmentbondyieldsdeclinedby19,16and24basispointsintheeuroarea,UnitedKingdomandUSA,respectively,withinonedayofinitialassetpurchaseprogramannouncementsinMarch2020.Jointly,aggressiveQEandfiscalstimulusattheonsetofthepandemicwereneededtostabilisewelfareandpreventilliquidity(andindeedtherehasbeenalmostanabsenceofexpectedadversemacro-financialfeedbackeffectsgivenhowaggressivethecurrentmonetarytighteningcyclehasbeen).Thisstability,however,wasachievedattheexpenseoflargefiscaldeficitsandexpandedbalancesheets,andtheinitialstokingof

inflationarypressures.

2.2Theeconomicreopeningperiod(2020Q3-2021Q4)

Aseconomiesbegantore-openduringsummer2020,aggregatedemandincreasedsharply,drivingaquickrecoveryinGDP(Figure1).Thiswaspartlycausedbypent-upordelayedspending,aswellasloosefiscalandmonetarypoliciesprovidingfurthercushionstohouseholds,firmsandthemacroeconomy.Moreover,ashiftinconsumerpreferencesthatoccurredduringlockdowns,alongsidestill-stringentgovernmentpoliciesinthistimeledtoamismatchinsupplyanddemandwhich,jointlywiththeexcessaggregatedemand,ledtothefirstsignsofaninflationarysurgeasearlyasthesecondhalfof2020,particularlyintheUSA.Throughout2021,

thismismatchwouldbeexacerbatedbysupplychaindisruptions.

7

Asestablishedabove,households–onaggregate–accumulatedasignificantamountofexcesssavingsduringtheCovidshockperiod.Creditanddebitcarddataindicatethat,asrestrictionsbegantobeliftedinthesecondhalfof2020,spendingroseaccordingly,inlinewiththetheorythattheseaccumulatedsavingshadbeen‘forced’andthatthisbehaviourcouldbecharacterisedas‘pent-up’ordelayedspending(See,forinstance:BEA2023,Byrneetal.2020;ONS2023).Inaddition,thecontinuationofaccommodativefiscalandmonetarypolicyduringtheeconomicreopeningperiodthroughoutallthreeeconomies,mostnotablyintheformofongoingQE,the$1.9trillionAmericanRescuePlan,the€750billionNextGenerationEUFundandthesuspensionofEUfiscalrules,furtherimprovedhouseholdandfirmbalancesheets.Meanwhile,housingandstockmarketrevivalsincreasedwealthforsome.Altogether,theseconditionsdroveaninitial‘overheating’ofthethreeeconomies,inwhichaggregatedemand

couldnotbemetbysupply.

Oneimportantconsequenceofthisexcessdemandwasariseincommodityprices.BernankeandBlanchard(2023)calculatethefirstprincipalcomponentofthe19commoditypriceseriesincludedintheCommodityResearchBureau(CRB)commoditypriceindex.Essentially,thiscomponentcanbethoughtofasacommontrendsharedbyall19commodities,whichtheauthorsfindexplainstwo-thirdsoftheoverallseries’variancesince1990.Thecommontrendcomponentinthesepriceseriessteepenedbetween2020Q2and2021Q2,mostprobablyresultingfromthelargeincreaseindemandfollowingtheinitialstageofeconomicreopenin

g4.

Theresultingincreaseincommoditypriceswassignificant.Forexample,by2021Q3,energypriceswere50percentabovetheir2019level(Celasunetal.2022)andalreadycontributinga

significantamounttoCPIinflation(Figure6).

4GiventhattheCRBindexspanscommoditiesrangingfrommetalstofood,changesintheirsupplybetween2020Q2and2021Q2weremostlikelyidiosyncratic.BernankeandBlanchard(2023)thereforeinterprettheincreasedcommontrendasreflectingaglobalaggregatedemandshockinthistime.

8

Figure3.Somesupplyanddemandindicators

a)UnitedKingdomb)USA

c)Spain

Source:Datastream,OECD

Notes:‘Durablegoodsconsumption’inallthreechartsreferstohouseholdfinalconsumptionofdurablegoods;thesameappliesto‘servicesconsumption’fortheUKandUSA.IntheabsenceofEAdata,IuseSpainasanexample.DuetomissingSpanishdataonfinalhouseholdconsumptionofservices,Iuseanindexoftotalturnoverinthe

servicessector.

9

Demanddynamicsduringtheeconomicre-openingperiodwerefurthercomplicatedbysectoraldemandshifts.Consumerbehaviourchangedduringthefirsthalfof2020inresponsetothepandemic-relatedeconomicshutdown,andsomeofthesebehaviouralchanges–suchasincreasedremoteworkingordecreasedspendinginservices–mayhaveprovenpersistent.Spendingdatafromtheeconomicreopeningperiodsuggestthatstay-at-homerestrictionsinducedlifestylechanges,suchasanincreasedpreferenceforlockdown-friendlyhobbieslikegardeningorcontact-non-intensivetravel(cars),asseenbyincreasedspendinginrelatedgoodsalongsidedecreasedspendinginsimilarcontact-intensiveindustries(ONS2022;BernankeandBlanchard2023).Thistypeofsectoraldemandconcentrationinducedinflationbecausetherewasnotacorrespondingdecreaseinpricesinthesectorsexperiencingdecreaseddemandduetosupplyconstraintsfacingbothsectors.Figure3illustrates(inasimplifiedway)howasharpreboundindurablegoodsconsumptionfromthesecondhalfof2020onwardsoutpaceddomesticproductioncapacityaswellassupplyanddemandforservices(whichwaspartially,ifnotfully,restrictedduringthisperiod).Onceproductioncapacityhadbeenreachedand

inventoriesbegantodwindle,goodsshortagespropelledpricerisesfurther.

Supplychaindisruptions–orthehinderingofabusiness’abilitytoreceive,produce,ship,andselltheirproducts–occurredduringtheCovidshockperiodasaresultofthepartialeconomicshutdown,andre-emergedduringtheeconomicreopeningperiod,furtheraggravatingsupplyanddemandmismatches(Adriantomangaetal.2023).Asshowninfigure4,inlate2021,globalsupplychaindisruptionswereover4standarddeviationsabovetheirhistoricalaverage.Thesebottlenecks,suchasincreasedshippingcosts,deliverybacklogsandreducedinventories,allcontributedtorisingpricesinthisperiod,eveninindustriesthatdidnotfacehugedemandincreasesorreducedlaboursupply.Attheirpeak,supplychainissuesmayhavecontributedaround50percentoftheincreaseinmanufacturingproducerpriceinflationandsome2percentagepointstoCPIinflationin2021inallthreeeconomies(Celasunetal.2022;GordonandClark2023;Haskeletal.2023).BernankeandBlanchard’s(2023)decompositionoftheCRBpriceindices’principalcomponentsuggeststhatthecommontrendincommoditypricessteepenedonceagaininthefourthquarterof2021,likelyduetothisglobal

negativesupplyshock.

10

Figure4.Globalsupplychainpressureindex

Source:FederalReserveBankofNewYorkinNationalInstituteGlobalEconomicOutlook

Inthecaseofthesemiconductorindustry,forexample,alargeincreaseindemandforelectronicsduring2020alongsideworkrestrictionsledtoascarcityofthisinput,whichhasnosubstitutesandalengthyproductionprocesslargelyconcentratedinAsia(LaBelleandSantacreu2022).Asaresultofaninabilitytoincreaseproductioncapacity,supplychaindisruptionsemergedinindustriesthatusesemiconductorsasadirectinputin2021.Forinstance,thedemandincreasefornewcars(possiblydrivenbyanewfoundanti-contagionpreference)couldnotbemetduetotheautomobileindustry’srelianceonsemiconductors,leadinginventoriestofalltorecordlowsandpricestospike,contributingsignificantlytoinflationintheUSAinparticular(BernankeandBlanchard2023).DunnandLeibovici(2021)estimatethatdisruptionscauseda4percentagepointgapintheaveragepricechangebetweensemiconductor-dependentandnon-dependentindustriesbySeptember2021–wheretheformeriscalculatedtoaccountfor39percentoftotalUSAmanufacturingoutput.ThissemiconductorshortagehadsimilareffectsintheUnitedKingdomandeuroarea,thoughatasmallerscale.Themanufacturingcomponentofproducerpriceindex(PPI)inflationwere6and10percentagepointshigherin2021Q2thantheir2017-2019averages,intheUnitedKingdomandeuroarearespectively,comparedto14percentagepointshigherintheUSA(Celasunetal.2022).AllthreeeconomieshavesinceannouncedpoliciesintheformoftheNationalSemiconductorStrategy(UnitedKingdom),EuropeanCHIPSActandCHIPSAct(USA)ina

partialattempttoreducedomesticrelianceonglobalsupplychainsinthisindustry.However,

11

thesetypesofpolicies,ifsuccessful,takesometimetoimplement,indicatinghowdifficultitcan

beforpolicymakerstoeasesuchsupplyshocksinthemedium-term.

Labourmarketsalsoexperienceddemandandsupplymismatchesinthisperiod.Figure5aillustrateshow,duringtheeconomicreopeningperiod,unemploymentratesfellbacktowardspre-Covidlevels,mostnotablyintheUSA,whichhadaverydifferentlabourmarketexperienceduringtheCovidshockrelativetoEurope.Nonetheless,weakenedlabourforceparticipation-whichmayhaveresultedfromfactorssuchasanti-contagionpreferences,anincreaseinlong-termsickness,anddiscouragementfollowingunemploymentorfurlough-decreasedlaboursupplyrelativetolabourdemand,particularlyinservicesindustries(Celasunetal.2022).LabourshortageswereworstintheUSA,wherearound40percentofproducerswerereportinglabourshortagesinlate2021,comparedtoaround20percentintheeuroareaand15percentinthe

UnitedKingdom(Celasunetal.2022;ONS2021).

Figure5.Labourmarketindicators

a)Unemploymentratesb)Tightnessindicators

Sources:ONS,FRED,Eurostat,IMF,Author’scalculations