The Post-COVID Explosion

Every previous episode in this series had a single dominant cause. Episode 1 was demobilization. Episode 4 was oil. Episode 5 was the Iranian Revolution. Episode 8 was a commodity supercycle followed by a financial crisis. But Episode 9 is different. The post-COVID inflation was not one shock — it was the convergence of four separate forces, each of which alone might have been manageable, but which together produced the most sustained price acceleration since the early 1980s.

The four forces: the most aggressive fiscal stimulus in American history, flooding households with cash; the most accommodative monetary policy ever attempted, with the Fed holding rates at zero for two years while buying $120 billion in bonds per month; the most severe supply chain disruption since World War II, as factories shuttered and shipping lanes clogged; and a commodity shock driven by Russia's invasion of Ukraine, which pushed energy prices to their highest levels since Episode 8. Each alone was significant. Together, they produced 9.1% inflation.

In January 2020, the American economy appeared to be in the best shape in a generation. Unemployment stood at 3.5% — its lowest level since 1969. CPI inflation was running at 2.5%, almost exactly at the Fed's target. Industrial production was humming along at 101. The Fed had cut rates three times in 2019 — from 2.40% to 1.55% — as an "insurance" measure against global trade tensions, but there was no sign of the approaching catastrophe.

The economy's strength was, ironically, part of what made the coming inflation so severe. American consumers entered 2020 with strong balance sheets, low debt service ratios, and rising wages. When the pandemic struck and Congress sent checks, these consumers were in a position to spend. They would.

On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. Within days, states began issuing stay-at-home orders. The economic impact was instantaneous and without precedent. Unemployment leaped from 3.5% in February to 14.8% in April — the highest reading since the Bureau of Labor Statistics began collecting data in 1948. It was not merely the worst monthly increase in history; it was worse than the entire Great Recession compressed into a single month. Industrial production plunged from 101 to 85 — a 16.6% decline in two months, steeper than the crash of 2008-09.

The CPI responded exactly as economics would predict when demand collapses: it fell. Year-over-year inflation dropped from 2.3% in February to 0.2% in May. Gasoline prices cratered — the gasoline CPI index fell from 218 in February to 169 in April, a 23% decline. WTI crude oil hit $16.55 per barrel in April, its lowest level since the 1990s. On April 20, West Texas Intermediate futures briefly traded at negative $37.63 — oil producers were paying buyers to take delivery.

The policy response dwarfed anything in American history. The CARES Act, signed on March 27, 2020, was a $2.2 trillion package — the largest single piece of legislation by dollar value ever enacted. It included $1,200 stimulus checks to most Americans, $600 per week in enhanced unemployment benefits, $350 billion in forgivable loans to small businesses through the Paycheck Protection Program, and hundreds of billions in aid to corporations, hospitals, and state governments.

The Fed moved just as aggressively. Between March 3 and March 15, it slashed the Fed Funds rate from 1.58% to effectively zero — 0.05% by April. It announced unlimited quantitative easing, purchasing Treasury securities and mortgage-backed securities with no stated cap. It established emergency lending facilities for corporate bonds, municipal debt, and even Main Street businesses. By December 2020, the Fed's balance sheet had grown from $4.2 trillion to $7.4 trillion — an increase of $3.2 trillion in nine months.

The M2 money supply tells the story most starkly. In January 2020, M2 stood at $15.4 trillion. By April — just two months later — it had jumped to $17.0 trillion, an increase of $1.6 trillion in sixty days. By December 2020, it reached $19.2 trillion. By its peak in early 2022, M2 had swollen to $21.7 trillion — a 39% increase from pre-pandemic levels. Nothing like it had ever happened in peacetime. The closest analogue was the monetary expansion of World War II.

At the time, this did not look inflationary. Prices were falling. Unemployment was catastrophic. The economy had lost 22 million jobs in two months. The conventional wisdom — shared by the Fed, Congress, and most economists — was that the greater risk was doing too little, not too much. The lesson of 2008 loomed large: the recovery from the financial crisis had been painfully slow, partly because the fiscal response had been too small. This time, the consensus held, they would not repeat that mistake.

They did not. They made a different one.

The inflation arrived in spring 2021, and at first it looked exactly like what Fed Chair Jerome Powell called it: transitory. Used car prices surged 45% as semiconductor shortages choked new car production. Lumber prices tripled as homebuilding demand collided with sawmill shutdowns. Shipping container rates from Shanghai to Los Angeles increased tenfold, from $1,500 to $15,000. Each of these disruptions had a specific, identifiable, supply-side cause. Each was expected to resolve as the economy normalized.

CPI year-over-year jumped from 1.7% in February 2021 to 4.1% in April and 5.3% in June. Some of this was base effects — the comparison months from 2020 had been artificially depressed by the pandemic. The Fed argued, with considerable logic, that you couldn't measure underlying inflation by comparing against the most unusual economic period in modern history.

But the inflation kept climbing. By October 2021, CPI hit 6.2%. By December, 7.2%. The used car story had become a used car and rental car and hotel and airfare and meat and furniture and appliance story. Wages were rising — particularly at the bottom of the income distribution, where labor shortages in hospitality, retail, and logistics were most acute. Workers were quitting in record numbers in what became known as the "Great Resignation." The number of job openings exceeded the number of unemployed workers for the first time in recorded history.

The transitory thesis was not wrong about the initial impulse — the spring 2021 inflation was genuinely supply-driven. But it was catastrophically wrong about the persistence. The massive fiscal transfers had given American households approximately $2.8 trillion in excess savings — money above what they would have saved in a normal economy. When supply constraints meant there were fewer goods to buy, this wall of cash simply bid up prices further. Demand-pull inflation was now layered on top of cost-push inflation, and the distinction between "transitory" and "persistent" had become academic.

On November 30, 2021, Powell retired the word. "It's probably a good time to retire that word and try to explain more clearly what we mean," he told the Senate Banking Committee. By that point, CPI was running at 6.9% and accelerating.

If the story had ended there — supply chain disruptions and excess demand driving CPI to 7% — the post-COVID inflation would have been historically notable but perhaps manageable. What turned it into the worst inflation episode since the Volcker era was the same force that had triggered Episodes 4, 5, 7, and 8: an energy shock.

On February 24, 2022, Russia invaded Ukraine. Russia supplied roughly 10% of global oil and 17% of global natural gas. The immediate market response was a commodity spike that rivaled the worst moments of the 1970s. WTI crude oil, which had already climbed from $52 in January 2021 to $83 in January 2022, surged to $109 in March and $115 in June. European natural gas prices increased fivefold.

For American consumers, the impact arrived at the gas pump with familiar brutality. The gasoline CPI index, already elevated at 290 in January 2022, rocketed to 367 in March and reached 430 in June — a level never before recorded. The national average price of regular gasoline crossed $5.00 per gallon for the first time in history, surpassing even the 2008 record. From the pandemic trough of 169 in April 2020 to the June 2022 peak of 430, gasoline prices had increased by 155%.

The energy shock pushed headline CPI from 7.9% in February 2022 to 9.1% in June 2022 — the highest reading since November 1981, when Volcker was still fighting the battle of Episode 6. For the first time in forty years, Americans experienced true broad-based inflation: food up 10.4%, energy up 41.6%, shelter accelerating toward 8%. Unlike the 2008 commodity spike, this was not just energy pulling the headline higher. Core CPI — excluding food and energy — was running at 5.9%. The inflation was everywhere.

The Federal Reserve began raising interest rates on March 16, 2022 — a full year after inflation had crossed 2%, and nine months after it had crossed 5%. By any historical standard, the delay was extraordinary. In previous episodes, the Fed had typically begun tightening within months of inflation emerging. The reason for the delay was the transitory thesis: the genuine belief, held with conviction by Powell and most FOMC members through late 2021, that the inflation would resolve on its own as supply chains healed.

Once it started, the tightening was the most aggressive since Volcker. The Fed raised rates by 25 basis points in March, 50 in May, and then four consecutive 75-basis-point hikes — in June, July, September, and November — the fastest pace of increases since the early 1980s. The Fed Funds rate went from 0.08% in February to 4.10% in December — a 400-basis-point increase in ten months.

The initial results were encouraging. CPI peaked at 9.1% in June and began declining immediately: 8.5% in July, 8.2% in August, 8.2% in September, 7.8% in October, 7.1% in November, 6.4% in December. Much of the decline was energy: oil fell from $115 in June to $76 in December as recession fears grew and the U.S. released a record 180 million barrels from the Strategic Petroleum Reserve. Gasoline prices followed, and the mechanical contribution of energy to headline CPI reversed.

But the Fed had learned the lesson of the 1970s — this entire series' central lesson — about the danger of declaring victory too early. Arthur Burns had eased prematurely in 1974. G. William Miller had never tightened enough in 1978. Both had allowed inflation to re-accelerate. Powell, having studied those failures, signaled that rates would remain elevated even as headline CPI declined. "We will stay the course until the job is done," he said repeatedly through the second half of 2022.

The remarkable feature of this episode, compared to every previous one in this series, was that the Fed tightened without causing a recession — at least through the end of 2022. Unemployment, which had recovered from 14.8% to 3.5% by late 2022, barely budged as rates rose. GDP growth slowed but remained positive. The housing market cooled sharply — mortgage rates doubled from 3% to 7% — but there was no broad-based economic contraction.

This was unprecedented. In Episodes 4, 5, 6, and 8, fighting inflation had always required a recession. Volcker's war on inflation in Episode 6 cost 10.8% unemployment. Even the mild 1990-91 recession followed the Fed's tightening in Episode 7. The emerging possibility that the Fed might achieve a "soft landing" — reducing inflation without triggering a recession — was the first genuinely novel development in inflation management since Volcker's innovations four decades earlier.

The post-COVID inflation was the first episode since the 1970s-80s in which inflation became broad-based — affecting not just energy but food, shelter, goods, and services simultaneously. The comparison table shows how it stacks up against the two most significant inflation episodes of the twentieth century.

The post-COVID inflation settled the "transitory" debate — but not the way either side expected. The initial supply-chain inflation of spring 2021 was, in fact, transitory — used car prices eventually normalized, shipping rates fell, and semiconductor supplies improved. But by the time those specific pressures resolved, the broader inflation had become embedded in wages, rents, and services. The word "transitory" failed not because the supply shocks were permanent, but because the demand shock — five trillion dollars of fiscal stimulus meeting an economy at zero interest rates — was strong enough to sustain inflation even as the original causes faded. The lesson is that the distinction between "transitory" and "persistent" depends less on the nature of the initial shock than on the policy response surrounding it.

Monetary expansion matters, with a lag. Milton Friedman's dictum that "inflation is always and everywhere a monetary phenomenon" had fallen out of fashion during the low-inflation 2010s, when massive QE produced no inflation. The post-COVID episode revived it — but with an important nuance. The 2010s QE went into financial assets, supporting bond and stock prices without reaching consumer spending. The 2020-21 expansion was different because it was paired with direct fiscal transfers to households. When freshly created money goes directly into consumer bank accounts — via stimulus checks, enhanced unemployment, and PPP loans — the inflationary impact is far more immediate. M2 surged 39%. Prices followed.

The speed of the Fed response matters as much as its magnitude. This series has documented the consequences of delayed tightening repeatedly — Burns in the 1970s, Miller in the late 1970s. Powell's delay in 2021 added to the pattern. The Fed held rates at zero for a full year after CPI crossed 5%, maintaining the position that inflation was transitory. By the time it began tightening, it had to raise rates at the fastest pace since Volcker to catch up. Whether the delay was justified — given the genuine uncertainty about the nature of the inflation — or whether earlier action would have prevented the surge from reaching 9.1%, will be debated by monetary economists for decades.