Brainard reflects on effects of COVID, war on inflation

The “relative inelasticity of supply in key sectors” sets the economy of the past three years (encompassing the COVID-19 pandemic and the Russian war in Ukraine) apart from the 30-year period prior, Federal Reserve Vice Chair Lael Brainard said in remarks today. Brainard provided a lookback at the economic factors—particularly those related to the supply chain—that have contributed to the elevated inflation levels currently observed worldwide and highlighted potential takeaways that could influence future policy.

Among other things, she noted that “it is important to explore whether any features of the inelastic supply response associated with the pandemic and the war may have implications for potential growth and macroeconomic stability in the future.” Brainard concluded that “a protracted series of adverse supply shocks could persistently weigh on potential output or could risk pushing inflation expectations above target in ways that call for monetary policy to tighten for risk-management reasons.” She added that “it is possible that longer-term changes—such as those associated with labor supply, deglobalization and climate change—could reduce the elasticity of supply and increase inflation volatility into the future.”