The COVID-19 pandemic triggered one of the most extraordinary economic disruptions in modern history. Governments responded with unprecedented fiscal spending, while central banks deployed aggressive monetary stimulus. In the United States alone, trillions of dollars were injected into the economy as policymakers attempted to stabilize incomes, businesses, and financial markets.
At the same time, the Federal Reserve reduced interest rates to zero and restarted large-scale asset purchases. Similar policies were implemented across the developed world. What made this crisis unique was not just the scale of intervention, but the nature of the shock itself.
A Recession Unlike Any Other
The pandemic created a simultaneous supply and demand shock. Production capacity contracted as factories shut down and logistics networks stalled. Shortly after, demand collapsed as households were confined to their homes and consumption fell sharply.
This was no ordinary recession. Today, demand is rebounding rapidly—fueled by stimulus and pent-up consumption—while supply remains constrained. Production, transportation, and labor markets take time to normalize. The result is a growing imbalance between demand and supply, an environment historically associated with rising prices.
The rationale behind aggressive fiscal support was clear: prevent mass bankruptcies, contain unemployment, and avoid long-term scarring of the economy. Allowing widespread corporate failures would have locked in structurally weaker demand for years to come.
From Disinflation to a Turning Point
For four decades, the global economy operated in a broadly disinflationary environment. Consumer price inflation remained subdued, bond yields trended lower, and monetary stimulus repeatedly failed to generate sustained price pressures. While asset prices inflated, consumer prices did not.
That long era may be ending.
The conditions created during the pandemic—massive fiscal spending, direct income support, government-backed lending, and coordinated monetary policy—represent a structural break from the past. Together, they form a credible foundation for the return of inflation.
Why Money Supply Matters More Than Ever
Inflation is ultimately a monetary phenomenon, but not all money is created equally. What matters is not base money, but broad money—the money that circulates through households and businesses.
Broad money grows in two ways:
- Commercial bank lending
- Government deficits directly monetized or guaranteed by the state
For most of the post-2008 period, money creation relied almost exclusively on the first channel. Quantitative easing expanded central bank balance sheets but did not meaningfully increase broad money. Banks accumulated reserves—but did not lend.
That changed in 2020.
Government loan guarantees, fiscal transfers, and direct support programs shifted money creation away from banks’ risk appetite and toward state-backed credit expansion. This altered the mechanics of the monetary system itself.
The OECD total money supply growth number. In the deepest recession since World War II, we’ve got the fastest money growth in money since 1981. There isn’t necessarily a link between the scale of growth of money and inflation. But the transformational thing is already behind us, we have gone from broad money growth of about 6 to 7 % previously to 17,5 % globally in 6 months. Inflation expectations will jump.
Why Quantitative Easing Failed to Create Inflation
QE was often misunderstood as “money printing.” In reality, it was largely an asset swap—government bonds exchanged for bank reserves. Unless banks expand lending, reserves do not become circulating money.
For over a decade, QE inflated debt without expanding money. Corporate and sovereign leverage rose, but balance sheets weakened. This debt-heavy expansion exerted deflationary pressure rather than inflationary force.
The pandemic response broke that pattern. Government guarantees removed credit risk from banks, enabling lending to surge. When banks lend under government protection, money is created directly—and rapidly.
When governments and central banks act in tandem, money supply growth accelerates dramatically. This coordination—often referred to as fiscal dominance—marks a profound regime shift.
Once central banks guarantee loans or finance deficits directly, they are no longer merely influencing credit conditions; they are actively creating money. History shows that sustained inflation requires exactly this combination.
The pandemic response delivered it.
Are Low Interest Rates Inflationary?
Counterintuitively, low interest rates can be deflationary if they increase debt without increasing money. For years, cheap credit encouraged leverage, not spending.
Monetary policy influences inflation by controlling the quantity of money, not merely its price. When rates suppress risk without stimulating lending, debt rises faster than income, and inflation remains absent.
The pandemic reversed this dynamic by forcing money directly into circulation.
Consumer Behavior and the Velocity Effect
Money supply alone does not cause inflation—velocity matters. During lockdowns, money velocity collapsed to historic lows. Savings surged, spending stalled.
As economies reopen, this changes. Pent-up demand is released. Services resume. Consumption normalizes. As velocity rises, the expanded money stock begins to translate into higher prices.
Once inflation expectations take hold, behavior shifts further. Consumers bring spending forward, accelerating money circulation and reinforcing inflationary momentum.
Political Economy and Structural Inflation
Inflation regimes are rarely purely economic—they are political.
Direct payments, loan forgiveness, infrastructure spending, green investment, and social programs all increase the money supply, where it is most likely to be spent. These policies are politically attractive and economically inflationary.
At the same time, globalization is reversing. Protectionism, reshoring, trade barriers, and labor scarcity shift bargaining power back toward workers. Rising wages increase costs and reinforce price pressures.
China, once a deflationary exporter, is now exporting inflation through higher input costs and producer prices. Trade deficits ensure those costs are imported into developed economies.
Commodities and Supply Constraints
Commodity prices are surging due to supply disruptions—and demand is accelerating. Infrastructure spending, electrification, and energy transition policies are commodity-intensive.
If supply remains constrained while fiscal stimulus persists, commodities become a powerful inflation transmission channel going forward.
Central Banks: Trapped by Their Own Success
If inflation rises meaningfully, central banks face an impossible choice:
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Raise rates and trigger widespread insolvency
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Hold rates low and allow inflation to erode debt
Given record debt levels, higher rates are politically and financially unsustainable. Negative real rates become the least painful option.
Yield curve control, average inflation targeting, and tolerance for “temporary” inflation all point toward a deliberate strategy: inflate away debt.
Conclusion: The Inflation Regime Shift
The pandemic response permanently altered the structure of money creation. Government-backed credit expansion, fiscal dominance, shifting consumer behavior, deglobalization, and commodity constraints form a coherent inflationary framework.
Inflation is not guaranteed—but the conditions that suppressed it for forty years have materially weakened.
The inflation genie may already be out of the bottle. Putting it back will not be easy.