A BOTTLENECK IS NOT INFLATION:

At the end of the third quarter of 2021, total dollar spending on the economy was back to where it would have been had there been no pandemic. This robust recovery in total dollar spending, or nominal gross domestic product (NGDP), was due to the large injections of cash from Congress and the accommodative monetary policy of the Federal Reserve. Some observers view this support as creating excessive demand for goods and services, contributing to shortages and spawning the recent surge in inflation.

But had there been no pandemic, the economy would have reached its current size at a normal pace with the same low inflation rate that prevailed before the pandemic, as shown in the figure below. The level of demand, therefore, cannot be the main culprit for the inflation surge through the third quarter of 2021.

A better explanation for the higher inflation through this period is the change in the composition of total dollar spending. During the pandemic, households shifted away from spending on services--eating out, travel, leisure, etc.--because of COVID concerns and increased their expenditures on physical goods they could use at home, where they were stuck. As a result, spending on services declined below pre-pandemic levels while spending on goods rose above pre-pandemic levels. This shift in consumer spending preferences was imposed on an economy that was not equipped for it and was still in the process of reopening. As a result, this change in the composition of aggregate demand created supply chain bottlenecks, production problems and inflation.

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