Inflation and Wage Growth Since the Pandemic

Abstract

Following the worst of the COVID-19 pandemic, inflation has surged to 1980s levels in advanced economies. Motivated by vast differences in pandemic support across countries, we investigate the subsequent response of inflation and the feedback to wages. We exploit these differences to identify the effect these programs had on inflation and to examine the link between wages and inflation. Our empirical approach is based on a novel dynamic difference-in differences method based on local projections. Our estimates suggest that an increase of 5% in direct transfers (relative to trend) peaked at about an average 3 percentage points boost to the rate of inflation and wage growth after one year the support measures are introduced, with their effect waning by the second year. Moreover, since the pandemic and under a high-inflation environment, the role of inflation expectations on wage-setting dynamics have increased and become longer lasting.