The COVID-19 Economic Crisis and the 2021–23 Inflation

What happened in the financial markets in March 2020?

The first sign of the COVID-19 economic crisis came from the stock market. World share prices began to collapse on 20 February 2020, and the fall in the week of 24–28 February was the largest since the 2008 financial crisis. As the virus spread beyond China, concern shifted from factory supplies to falling business in the services sector. On 12 March the Dow Jones and the S&P 500 suffered their greatest single-day percentage fall since the 1987 crash, Britain's FTSE 100 fell 10.87 percent and Italy's FTSE MIB 16.92 percent. It was the second time after 9 March that the circuit breaker, which halts trading after a 7 percent drop, was triggered. 1 2

The oil market shook before the stock market did. When OPEC and Russia failed to agree on production cuts in early March, Saudi Arabia announced price cuts and higher output, and oil, already down more than 30 percent since the start of the year, fell by another 30 percent. The crash of 9 March ("Black Monday") came from this oil price war together with the epidemic. The energy expert Bob McNally said it was the first time since 1930–31 that a massive negative demand shock had coincided with a supply shock. The two countries agreed to cut output in early April, but with demand gone under lockdown, storage filled up, and on 20 April the futures price of West Texas Intermediate crude for May delivery went negative for the first time. With nowhere to put the oil, holders paid to get rid of their contracts. 1 3 4

By mid-March even the market for US Treasury bonds, supposedly the safest asset, stopped working properly. This phase, in which investors sold whatever they could to raise cash, is called the "dash for cash". In a report to the G20 that November, the Financial Stability Board summed up that the breadth and dynamics of the shock and the liquidity stress were unprecedented, and that a fundamental repricing of risk drove up demand for safe assets. The capital rules strengthened after 2008 kept the banks from failing, but banks were unwilling or unable to deploy their balance sheets amid the uncertainty, and dealers could not absorb the flood of sales. Large sales of Treasuries by some leveraged non-bank investors and by foreign holders made the dysfunction worse, and the report judged that without central bank intervention the stress would very likely have worsened significantly. 5 6

How deep did the lockdowns drag the world economy?

The direct cause of the recession was the lockdowns governments imposed to stop the spread of the virus. Sectors that depend on physical presence, such as passenger transport, the arts and entertainment, tourism and hospitality, fell by up to 30 percent in the second quarter of 2020 from the first, while agriculture, banking and real estate declined by 3 percent or less. Within seven months every advanced economy had fallen into recession. The International Labour Organization estimated that the equivalent of 400 million full-time jobs were lost in April–June 2020, and that the income of the world's workers fell by 10 percent, over $3.5 trillion, in the first nine months of the year. In the first quarter of 2020 the G20 economies shrank 3.4 percent year on year. 1 7

In the United States, unemployment claims in the week ending 21 March reached 3.3 million, breaking the 1982 record of 700,000, and 6.7 million the following week. The unemployment rate rose from 3.5 percent in February to 14.7 percent in April, the highest since 1941, as more than 25 million people lost their jobs. US real GDP fell nearly 9 percent in the second quarter from the first, and the European Union's real GDP fell more than 11 percent, the biggest drop in a single quarter on record. The IMF and others predicted that EU GDP would contract by 6 to 8 percent, a drop unprecedented since the Great Depression. China's economy shrank 6.8 percent year on year in the first quarter, its first contraction in almost fifty years, and South Korea's GDP fell 3.3 percent in the second quarter from the first, its worst performance since the first quarter of 1998. 1 7

In June 2020 the World Bank forecast that the world economy would shrink 5.2 percent that year, the deepest recession since the Second World War. The IMF's chief economist Gita Gopinath gave the crisis the name "the Great Lockdown", a name that recalled the Great Depression of the 1930s. Yet the COVID-19 recession was a sudden plunge caused by governments deliberately halting economic activity; recovery began in April 2020, and by April 2022 the GDP of most major economies had returned to or exceeded pre-pandemic levels. 8 9 1

Why did governments not spare money this time?

On 25–26 March the US Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), unanimously in the Senate and by voice vote in the House, and President Donald Trump signed it on 27 March. At $2.2 trillion, 10 percent of US GDP, it was the largest economic stimulus in US history, far larger than the $831 billion stimulus of 2009. It paid $300 billion in one-time cash payments, $1,200 to most adults, added $260 billion to unemployment benefits, and set aside $500 billion for loans to corporations and $339.8 billion for state and local governments. It also created the Paycheck Protection Program (PPP), whose loans to small businesses would be forgiven if they kept their headcount and wages stable. 10 11

President Joe Biden, who took office in January 2021, pushed through the $1.9 trillion American Rescue Plan Act (ARPA). With every Republican opposed, it passed the Senate 50 to 49 and the House 220 to 211, and Biden signed it on 11 March. It gave cash payments to taxpayers with incomes of $75,000 or less, allocated $350 billion to state and local governments and $300 billion to unemployment benefits, and through a temporary expansion of the child tax credit is estimated to have lifted more than 2 million children above the poverty line. The PPP, by contrast, was criticised for costing $169,000 to $258,000 per job saved, for sending most of its benefits to business owners, their creditors and suppliers rather than to workers, and because only about 25 percent of the money went to jobs that would otherwise have been lost. 12 11

In Europe the turn was even larger. In March 2020 the European Union activated the "general escape clause" of the Stability and Growth Pact so that member states would not be bound by the deficit rules, and on 21 July the European Council agreed in principle on a €750 billion recovery fund, Next Generation EU (NGEU). For the first time the EU borrowed jointly on behalf of its members to hand out grants and loans; Italy and Spain received the largest shares, and Greece almost 20 percent of its GDP. Germany, until then the strongest advocate of fiscal restraint and austerity in times of crisis, this time supported grants and large-scale common debt. The fund is seen as a break from the austerity policy the EU had adopted after the 2008 financial crisis as its main response to crises. It was the opposite of the euro area crisis of 2010–2015, when the southern countries were made to accept fiscal austerity as the price of their bailouts. 13 7

Spending on this scale carried out, far more fully than in 2008, the Keynesian prescription that governments should prop up demand in a slump. But the same spending was later blamed for feeding the inflation after 2021. Researchers at the Federal Reserve Bank of San Francisco estimated that the US government's $5 trillion of aid had added 3 percentage points to inflation by the end of 2021, while judging that the spending had been necessary to prevent deflation, which would have been harder to manage. 14 10

What did the central banks buy, and how much?

On Sunday 15 March the Federal Reserve cut its target for the federal funds rate, its policy rate, to 0–0.25 percent and announced that it would buy at least $500 billion more of Treasury securities and at least $200 billion of mortgage-backed securities. It was the fourth round of quantitative easing since 2008. Quantitative easing is a policy in which the central bank buys assets such as government bonds in large amounts with newly created money, putting money into the markets and pushing down long-term interest rates. The Fed said it expected to keep the rate at this level until it was confident the economy had weathered recent events; this practice of committing in advance to the path of policy in order to move market expectations is called forward guidance. 15 16

Because the dollar is the world's key currency, the crisis also strained dollar funding markets around the world. On 19 March the Fed set up new swap lines of up to $60 billion each with the Bank of Korea and the central banks of Australia, Brazil, Mexico, Singapore and Sweden, and of $30 billion each with those of Denmark, Norway and New Zealand. A swap line is an arrangement in which central banks exchange each other's currencies, letting the partner lend dollars to its own banks. On 23 March the Fed removed the limit on its purchases, saying it would buy Treasury and mortgage-backed securities "in the amounts needed to support smooth market functioning", and set up credit facilities totalling $300 billion, including two (the PMCCF and SMCCF) that bought corporate bonds directly at issuance and in the secondary market; the Treasury provided $30 billion of equity from the Exchange Stabilization Fund. 17 18 19

Other central banks followed. On 18 March the European Central Bank under its president Christine Lagarde announced a €750 billion Pandemic Emergency Purchase Programme (PEPP), allowed itself to depart from the rule of buying government bonds in proportion to each member's economy so that it could buy more of the bonds of countries under strain, and made Greek government bonds eligible. The PEPP was enlarged twice to €1.85 trillion and ended net purchases in March 2022. The Bank of Japan doubled its annual target for purchases of exchange-traded funds to ¥12 trillion, and the Bank of England's cumulative quantitative easing reached £895 billion by November 2020. The Fed's fourth round of quantitative easing added $2 trillion to its balance sheet by the summer of 2022. Critics such as Scott Minerd, chief investment officer of Guggenheim, said the 2020 stimulus had socialised credit risk, so that the price of a loan was now set by the Fed's willingness to buy it. 20 13 7 16 21

Why did the recovery take the shape of a K?

With central bank money pouring in, asset markets revived far faster than the real economy. Share prices began to rise in April 2020, and by the end of the year many indices had set new records. The recovery of those who had lost their jobs was much slower. In the convention of describing recessions and recoveries by the shapes of letters, a recovery in which one part climbs fast while another keeps falling came to be called K-shaped. The expression arose in the COVID-19 recovery, and in South Korea it entered policy debate as "K-shaped growth". 1 22

The fork began with the kind of work people did. Most of the workers who kept their jobs could switch to working online, and such work was on average much better paid, so the pandemic hit low-paid workers harder and widened income inequality. Worldwide, the extreme poverty rate rose from 8.9 percent in 2019 to 9.7 percent in 2020, the first rise in decades, and by 2.4 percentage points in South Asia. In the second quarter of 2020 disposable income per head in the EU fell sharply, cutting the spending of lower-income families in particular. 7

Why did the supply chains seize up?

Global supply chains first slowed in early 2020 as factories suspended work until safety precautions were in place. A product today is made through design, parts, assembly and logistics spread across many countries, and this whole range of production activity linked across borders is called a global value chain. Firms had long cut costs with lean ("just-in-time") manufacturing, bringing in only the parts needed when they were needed instead of keeping stock in warehouses. The method saves money when demand forecasts are accurate but is very weak against unexpected shifts in demand, and economists pointed to it as a major source of the supply chain disruption. 23 24

When the lockdowns lifted, demand rushed to the wrong place. Consumers in the United States and elsewhere bought goods for the home instead of services such as eating out and travel, and the supply of goods could not keep up. In November 2021 US inflation was 14.9 percent for durable goods but 3.8 percent for services. Factories in developing countries short of vaccines stopped again and again. In Vietnam, a major supplier of American clothing, outbreaks in 2021 forced many factories to close, and the government required workers in higher-risk regions to live at their workplace. Cargo piled up at ports for lack of staff, and the chip shortage halted the car and electronics industries. 14 23

The paralysis of the supply chains showed how deeply the world economy depends on itself. When supply chains paused during COVID-19, the exchange of raw materials and finished goods broke off, and afterwards firms in many countries turned to reshoring and nearshoring, moving production home or to nearby countries. Since the US–China trade war of 2018, supply chain rerouting through third countries to avoid tariffs had already been under way, and the pandemic and the war hastened this reorganisation. The World Bank warned that since the 2008 financial crisis trade growth had been sluggish and the expansion of global value chains had stalled, and that conflicts among large countries could lead to their retrenchment or segmentation. 24 25

Why did prices rise so much in 2021–2023?

From mid-2021 prices rose faster in much of the world than they had for decades. US consumer price inflation reached 5 percent in May 2021, the first time at that level since 2008, went through 6.2 percent in October and 6.8 percent in December, and peaked at 9.1 percent in June 2022, the highest since 1981. Euro area inflation reached 10.7 percent in October 2022, the highest since records began in 1997; Germany's 11.7 percent was the highest since 1951, and Britain's 10.1 percent in July 2022 a forty-year high. The causes cited include the mismatch of demand and production left by the pandemic, supply chain disruptions, the large stimulus of governments and central banks in 2020–21, and price increases by firms. In the United States the housing shortage also played a large part: the Census Bureau found that without housing costs inflation at the end of 2023 would have been 1.8 percent instead of 3.2 percent. 14

Russia's invasion of Ukraine on 24 February 2022 added an energy and grain shock to prices already rising. Before the invasion Ukraine accounted for 11.5 percent of the world wheat market and 17 percent of corn exports, and that grain could not reach international markets. Brent crude jumped from $97.93 a barrel on 25 February to $127.98 on 8 March. In Europe gas prices rose by more than 450 percent and electricity by 230 percent in less than a year. In answer to sanctions Russia cut gas deliveries to Germany through Nord Stream 1 and halted them entirely in early September. Mark Zandi of Moody's Analytics found that 3.5 points of the 8.6 percent US inflation rate of May 2022 were due to the invasion. A phase in which war and sanctions disrupt energy and supply chains, raising prices while dragging down growth, is sometimes called geopolitical stagflation. 14 26

Right after the invasion the West froze the foreign reserves the Central Bank of Russia held in Western countries and expelled several Russian banks from the SWIFT payments network. In May 2023 the G7 and the EU announced that the roughly $300 billion frozen, about half of the Russian central bank's foreign currency and gold reserves, would stay frozen until Russia paid for the damage it had caused Ukraine. The rouble fell 30 percent, to as low as 119 to the dollar on 28 February. Once it was clear that even another state's central bank assets could be frozen, de-dollarisation, the effort to reduce dependence on the dollar, gained momentum among countries whose course diverged from Washington's. 27 28

From the start economists split over whether the inflation was transitory or persistent. Larry Summers, Treasury Secretary under Clinton, and Olivier Blanchard warned that the huge stimulus would overheat the economy and make inflation persistent. Summers called the American Rescue Plan "the least responsible macroeconomic policy we've had in the last 40 years" and put at one in three the chance that inflation would accelerate over the next several years, with the United States possibly facing stagflation. Paul Krugman and Treasury Secretary Janet Yellen saw it as a transitory effect of emerging from the pandemic. Federal Reserve Chairman Jerome Powell, too, called the inflation "transitory" through 2021. Monetarists pointed to the M2 money supply, which grew during the pandemic at the fastest rate in decades, but in December 2021 Powell said the once-strong link between the money supply and inflation had "ended about 40 years ago". M2 had also risen about 45 percent in 2010–15, yet inflation had fallen. 14 12

How much did corporate profits contribute to inflation?

While prices soared, corporate profits set records too. A 2021 analysis by The New York Times found the profit margins of more than 2,000 listed companies well above their pre-pandemic average, and economists at the University of Massachusetts Amherst found that US profit margins in 2022 reached their highest level since just after the Second World War. The big oil companies reported record profits in 2022, and in July Britain imposed a 25 percent windfall tax on North Sea oil producers. In this setting some Democratic politicians and economists in the United States spread the word "greedflation" for firms raising prices by more than their costs under cover of inflation; it was a candidate for the Collins English Dictionary's word of the year in 2023. 14

The theoretical frame for the debate came from the 2023 paper "Sellers' Inflation, Profits and Conflict" by Isabella Weber and Evan Wasner of the University of Massachusetts Amherst. They argued that the US COVID-19 inflation was predominantly a "sellers' inflation" arising not from macroeconomic causes but from the ability of firms with market power to raise prices. Such firms raise prices only when they expect their competitors to do the same, and sector-wide cost shocks and supply bottlenecks coordinate that implicit agreement. From earnings calls and firm data they drew three stages: (1) prices rise in systemically significant upstream sectors because of commodity markets or bottlenecks, creating windfall profits; (2) downstream sectors pass the increase on to protect their margins, or amplify it where bottlenecks give them temporary monopolies; (3) labour tries to fend off falling real wages in a conflict stage. Weber also argued that the chip shortage gave existing carmakers a "temporary monopoly" free of new entrants. The remedy that followed was not higher interest rates but strategic price controls in bottleneck sectors. 29 14 30

Research by several institutions began to measure the share of profits. In January 2023 the Federal Reserve Bank of Kansas City estimated that markup growth (the margin firms add on top of costs) had likely contributed more than 50 percent of inflation in 2021, while adding that it might signal that firms expected their future costs to rise. European Central Bank economists found in May 2023 that wider profit margins had been a bigger factor than rising wages in the inflation of the second half of 2022, and in June 2023 the IMF found that rising corporate profits accounted for almost half of the rise in euro area inflation. On the unweighted OECD average, profits per unit of output rose about 22 percent from end-2019 to the first quarter of 2023 and wages per unit about 16 percent. On the other side, Jason Furman, who chaired Obama's Council of Economic Advisers, said that blaming inflation on greed was like blaming a plane crash on gravity, and The Economist called the whole concept "nonsense". If firms had that much market power, the objection ran, they could have raised prices at any time, pandemic or not. 14 31

How fast did the central banks raise interest rates?

On 16 March 2022 the Federal Reserve raised its federal funds target to 0.25–0.5 percent, its first increase in three years. Its statement said inflation reflected supply and demand imbalances related to the pandemic and higher energy prices, and that Russia's invasion would add upward pressure. It also said it would soon begin reducing its holdings of Treasury and mortgage-backed securities; this reversal of quantitative easing is called quantitative tightening. The Fed raised rates by 0.5 points in May and by 0.75 points in each of June, July, September and November, and on 26 July 2023 reached 5.25–5.5 percent, the highest since 2001. The 30-year fixed mortgage rate rose to 8 percent, a 23-year high, and 2023 was the worst year for US home sales since 1995. 32 14 33 34

The European Central Bank raised rates in July 2022 for the first time in eleven years, and by 14 September 2023, after ten consecutive increases, its rate stood at 4 percent, the highest since the euro was launched. The Bank of England raised rates nine times in 2022 alone, to 3.5 percent in December, and to 5.25 percent on 3 August 2023, the highest since 2008. Only the Bank of Japan kept its negative rate, and at least 75 central banks around the world raised rates aggressively. Because the Fed moved faster than Europe, the dollar strengthened, and in July 2022 the euro fell below the dollar for the first time in twenty years. Energy-importing countries bore a dearer dollar and dearer energy at once, and the World Bank warned that fighting inflation with rate hikes had raised the risk of a global recession. 14

What did the rapid rate rises break, and where? {uk}

The first crack appeared in the market for British government bonds (gilts). On 23 September 2022 Kwasi Kwarteng, Chancellor of the Exchequer to Liz Truss, who had become Prime Minister on 6 September, delivered "The Growth Plan", widely called the mini-budget. It promised the largest tax cuts in fifty years, including abolishing the 45 percent top rate of income tax and cancelling a rise in corporation tax, to be paid for by borrowing, and it came without an independent forecast from the Office for Budget Responsibility. Markets reacted at once. On 26 September the pound fell to $1.0327, its lowest since 1971, and banks fearing higher rates withdrew mortgage products, 40 percent of which had gone by 29 September. The IMF took the unusual step of criticising the budget as likely to increase inequality and urging the government to re-evaluate it. 35

The pension funds made the crisis worse. Many had used liability-driven investment (LDI) derivative strategies to manage the risk of interest rate changes, and when gilt prices plunged they had to post cash as extra collateral, selling gilts to raise it and driving prices down further. The Bank's Deputy Governor Sir Jon Cunliffe later said some funds had been a matter of hours from being wound up. On 28 September the Bank of England, warning that dysfunction in the long-dated gilt market posed a material risk to financial stability, announced that it would buy long-dated gilts "on whatever scale is necessary" until 14 October. A central bank that had been raising rates and preparing to sell its bonds to fight inflation now had to buy bonds again for the sake of financial stability. Truss reversed the tax cuts one after another and dismissed Kwarteng, but in the end resigned; with fifty days in office she became the shortest-serving prime minister in British history. 35 36 37

In March 2023 American banks failed. During the pandemic, as money poured into technology companies, Silicon Valley Bank's deposits doubled from $62 billion in March 2020 to $124 billion in March 2021, and it put most of the money into long-term Treasury bonds for a slightly higher return. When interest rates rise the value of bonds already issued falls, so the Fed's rate rises left large unrealised losses on these bonds. As depositors began to withdraw, SVB announced on 8 March that it had sold $21 billion of securities at a loss, and $42 billion left the next day alone. On 10 March the California authorities closed the bank and placed it in the receivership of the Federal Deposit Insurance Corporation (FDIC). It was the third-largest bank failure in US history, and about 89 percent of its deposits exceeded the insured limit of $250,000. 38 39

In the same week Silvergate Bank and Signature Bank, both exposed to cryptocurrency, also failed. Regulators announced that all deposits at SVB and Signature Bank would be honoured regardless of the insurance limit, and the Fed set up a Bank Term Funding Program (BTFP) letting banks borrow for up to a year against Treasuries and other qualifying assets. By 16 March banks had borrowed about $150 billion from the Fed's discount window. Then $100 billion of uninsured deposits fled First Republic Bank, which was closed and sold to JPMorgan Chase on 1 May. Some called the government response a bailout, but this time it rescued neither the banks nor their managers and shareholders; it made uninsured depositors whole from the sale of the banks' assets. 39 38

What happened to workers' real wages and strikes? {uk}

When prices rise faster than pay, the same or slightly larger wage buys less. This real wage, money wages divided by prices, fell across the developed world after 2021. In its 2023 employment report the OECD found that real wages had fallen by an average of 3.8 percent over the year: labour markets had pushed up nominal wages, but less than inflation, so real wages fell in almost all industries and OECD countries. The Marxist economist Michael Roberts called it the largest and longest fall for at least fifty years. The OECD also found no sign yet of a price-wage spiral. In Britain, essential prices began rising faster than household incomes in late 2021, giving rise to the term "cost-of-living crisis", and Retail Price Index inflation peaked at 11.1 percent in October 2022. In the United States the minimum wage was worth less than at any time since 1956. 31 40 14

British workers rose up demanding pay rises that kept pace with inflation. In May 2022 members of the National Union of Rail, Maritime and Transport Workers (RMT) voted 89 percent in favour of a strike, and from 21 June the first national rail strike in thirty years began, the largest wave of industrial action since 1989. Strikes spread to telecommunications, the post, the legal profession and freight, and union leaders organised the "Enough is Enough" campaign demanding a return to earlier energy rates and real-terms pay rises. In October 2022 the Royal College of Nursing balloted its 300,000 members on strike action for the first time in its 106-year history, and in February 2023 junior doctors in England voted for a 72-hour walkout in pursuit of a 26 percent pay rise. Teaching unions also balloted for rises close to inflation. 41 40

In the United States the United Auto Workers began on 15 September 2023 the first simultaneous strike in the union's history against all three of Ford, General Motors and Stellantis. Its newly elected president Shawn Fain criticised wages that had not kept up with inflation and demanded an end to the tiered system that holds new hires on lower pay and the restoration of cost-of-living adjustments and retirement benefits lost in the 2008 financial crisis. The strike ended after 46 days on 30 October; the tentative agreement with Ford gave a 25 percent wage rise over four and a half years plus a cost-of-living adjustment, which together could raise pay by 30 percent. Across the US wage distribution, one analysis found that from 2020 to 2022 wages at the 10th percentile beat inflation by 5.7 percent, while real wages fell 1 percent at the median and 5 percent at the 90th percentile. 42 14

How did China pass through these years?

After locking down Wuhan on 23 January 2020, China kept its "zero-COVID" policy, which used testing, tracing, isolation and lockdowns to bring local transmission back to zero whenever infections appeared, longer than any other large country. Having suppressed the first outbreak, it began restarting economic activity from February 2020, but in 2022, when the highly transmissible Omicron variant spread, lockdowns in Shenzhen, Shenyang and Jilin were followed at the end of March by Shanghai, the largest lockdown since Hubei in early 2020. That November, after the Ürümqi fire, discontent over the economic costs and the controls broke out in nationwide protests. On 7 December the government loosened the rules sweepingly, effectively ending the policy. 43

In the same years the property sector that had long propped up the Chinese economy faltered. Local governments had come to rely on selling land-use rights for revenue, and China's response to the 2008 crisis, carried out largely through local government infrastructure investment, deepened that reliance on rising land values. In 2020 Xi Jinping's leadership, on the principle that "houses are for living, not for speculation", introduced the "three red lines", limiting developers' borrowing relative to cash, equity and assets. Evergrande, which crossed all three, fell into crisis when a letter warning of a cash crunch circulated in August 2021, and in early December it defaulted on an offshore bond. Evergrande alone owed 2 trillion yuan ($310 billion) to retail investors, banks, suppliers and others. In mid-2022 buyers of unfinished flats began boycotting their mortgage payments, and in 2023 Country Garden, the largest private developer, reported huge losses. On 29 January 2024 a Hong Kong court ordered Evergrande to be liquidated. 44

How are this crisis and the inflation interpreted?

The first mainstream reading was demand overheating. Summers warned that the huge fiscal stimulus would overheat the economy, and when inflation came down after the Fed's rate rises he credited the central bank. In University of Chicago Booth School surveys of November 2021 and January 2022, more economists agreed than disagreed that the supply chain crisis was not the main driver of inflation and that the combined US fiscal and monetary stimulus risked prolonged high inflation. The supply-side reading, by contrast, saw inflation as coming from the bottlenecks and energy shocks of the pandemic and the war. At the end of 2023 Krugman, pointing to disinflation without recession, criticised the pessimists for dropping their original argument that rate rises would curb inflation through unemployment and now crediting the Fed for convincing people by acting tough. In 2024 the United States approached its inflation target while the economy kept growing, a so-called "soft landing". 14 45

The sellers' inflation school, like Weber and Wasner, stressed the path by which profits rose and prices with them through market power and supply bottlenecks. Marxist readings divided too. In December 2023 Michael Roberts argued that the inflation spike had been driven mainly by supply-side factors, not by "excessive monetary injections", "excessive aggregate demand" or "excessive wage demands", rejecting the explanations of the monetarists, the Keynesians and the central banks alike. He noted that firms with few competitors had widened their margins while supply chains were broken, but called this capitalists maximising profits rather than the "rather nebulous" notion of greed, and pointed out that the rise in US markups was temporary, peaking in the second quarter of 2022, and concentrated in a small number of firms and "systemic" sectors such as extractive industries, manufacturing, IT and finance; in Britain 90 percent of the increase in nominal profits went to 11 percent of firms. Roberts also held that capitalist economies are in the last analysis driven by profits and the profitability of capital, and that outside the tech giants and the energy companies most US corporations were earning low profitability. 45 29

These years also exposed disarray in the theory of inflation itself. In an interview at the end of 2023 Summers admitted that it had not been a glorious period for the Phillips curve theory, that there was no convincing successor, and that even monetarist theory was unclear about what nominal quantity sets the price level now that money pays interest. In the United States prices rose and then fell while unemployment stayed low, at about 4 percent. The manner of the response also left its marks. The fiscal spending and unlimited quantitative easing of 2020 reversed the austerity stance of the years after 2008, but there remained both a K-shaped recovery, in which asset markets revived before the real economy, and the fact that rapid rate rises had broken weak links in the pension funds and the regional banks. The paralysis of supply chains, the war and the sanctions led on to the reorganisation of global value chains and the debate over de-dollarisation. 45 14 13 1