What is the main cause of inflation post covid era

Posted by: admin 4 months ago

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Written by Dimas Mukhlas Widiantoro 

The PhD candidate in economics from Krakow University of Economics 

When we talk about inflation, there is two main major reason, the labor reason or the product reason. The labor reason is coming from the market tightnes, the wages. Meanwhile when we talk about product reason, it can be curbed into the supply demand situation, the alternative product price, and the shock price wages given.

source: Bernanke & Blanchard 2023

source: Bernanke & Blanchard 2023

source: Bernanke & Blanchard 2023

Based on the Article from Bernanke and Blanchard (2023) we see that in post covid, the product size impact significantly the inflation. Meaning that the shortage of supply, the shock from food and energy price, impact significantly the inflation. But its only happening in the very short term. Its because the system already fixed by itself. 

source: Bernanke & Blanchard 2023

So the main question that goes to, what is the major then, that impacthing infaltion that not goes down. And the answer is because, in labor market tighteness. It is true, if we want to follow the Phillip curve, that the labor market tighteness might not affecting the long run of inflation. But it can be happen if the labor market tighteness just happen temporary.

source: Bernanke & Blanchard 2023

If the labior market tighteness happen for the long term then it will affect so much. Therefore the government should focus on find the policy that can lower the overheating in labor market. 

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