Lael Brainard, Speech: What Can We Learn from the Pandemic and the War about Supply Shocks, Inflation, and Monetary Policy?

“The experience with the pandemic and the war highlights the challenges for monetary policy in responding to a protracted series of adverse supply shocks. In addition, to the extent that the lower elasticity of supply we have seen recently could become more common due to challenges such as demographics, deglobalization, and climate change, it could herald a shift to an environment characterized by more volatile inflation compared with the preceding few decades.”

“Some have conjectured that the slow and incomplete recovery of the workforce over the course of the pandemic may be the beginning of a longer-term change in labor supply dynamics (figure 9).12 In addition, the potential for more frequent and severe climate events, as we are already seeing, and for frictions in the energy transition could also lead to greater volatility of supply. Together, a combination of forces—the deglobalization of supply chains, the higher frequency and severity of climate disruptions, and demographic shifts—could lead to a period of lower supply elasticity and greater inflation volatility.”

“To conclude, the experience with the pandemic and the war highlights challenges for monetary policy in responding to supply shocks. 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.”