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It’s Not Just a U.S. Problem

Donald Calcagni, MBA, MST, CFP®, AIF®

Chief Investment Officer


This is a three-part series about why we’re experiencing inflation now and how it can be mitigated.

Part II: What Are the Causes of Today’s High Inflation? 


Inflation – not just a U.S. problem

Any genuine analysis of today’s high inflation must first acknowledge that it is global in nature; it is not a uniquely U.S.-phenomenon. According to the International Monetary Fund (IMF), year-over-year global inflation is currently running at 7.4%−specifically, 5.7% in advanced economies and 8.7% in emerging market and developing economies.1 Consequently, the fact that high inflation is occurring globally, and not just in the U.S., strongly suggests its root causes extend far beyond U.S. environmental policy, the profit margins of U.S.-based refiners, COVID-related spending, and even quantitative easing by the U.S. Fed.

Exhibit A: High inflation is global and not just a U.S. phenomenon.2


Russia’s invasion of Ukraine

It’s important to acknowledge that inflation prior to Russia’s invasion of Ukraine was already high at 7% for headline inflation and 5.5% for core inflation.3 Therefore, arguments that today’s high inflation is due to the invasion are overstated. U.S. economic growth surged in 2021 to its highest level since 1984, due in part to the development and distribution of new COVID vaccinations, significant pent-up demand, and trillions in COVID-related spending. Importantly, it surged at a time when businesses, and the global supply chains and labor markets they rely on, were all woefully unprepared to meet the rapid resurgence in demand—resulting in a significant imbalance between supply and demand that continues to persist today. Russia’s war on Ukraine is not a root cause of this supply-demand imbalance; but what the invasion did do was to act to sustain and greatly exacerbate it for three reasons.

First, the invasion itself injected a high level of uncertainty and price volatility into energy markets. Prior to the invasion, the price of oil was actually declining—and not by a little. Oil peaked in October 2021 at around $85 and gradually fell to a low of $62 in early December (see Exhibit B). Had markets continued on this trajectory, it’s quite feasible headline inflation might’ve moderated in early 2022 (and, in fact, core inflation—which excludes food and energy—did peak in March 2022). However, history took a different turn when headlines began to report U.S. intelligence assessments that Russia was planning an invasion of Ukraine. As rhetoric mounted, the price of oil rose, gradually at first, and then spiked on news of the invasion; volatility in WTI futures quadrupled between February 23 and March 9.4 The price per barrell peaked at $129.44 in intraday trading on March 8 and has remained elevated since.

Exhibit B: WTI Crude, October 1, 2021 – May 31, 20225

Second, global sanctions against Russian oil exports have resulted in an estimated decline of nearly 9.3% in global supply, removing a staggering 1 million barrels per day from global markets at a time when U.S. economic growth—and hence energy demand—remains exceptionally strong. Russian oil production is projected to fall further still, by over 20% from pre-invasion levels, through the end of 2023.6 The economic repurcussions of removing so much oil from global markets—something that so heavily influences the price of everything from food and gasoline to plastics and air travel—is staggering to put it mildly. Moody’s Analytics estimates that as much as 53% of today’s high inflation is either a direct or indirect result of elevated oil prices.7

Finally, the invasion exacerbated already highly stressed global supply chains. The New York Fed’s Global Supply Chain Pressure Index (GSCPI) reversed course (it was slowly improving) and rose a staggering 23% following the invasion.8 Perhaps a more tangible example of the war’s impact on global supply chains is its impact on global food supplies. Prior to the war, Ukrainian exports made up 10% and 15% of global wheat and corn supplies, respectively; Ukraine’s food exports are now expected to decline by as much as 80% in 2022, removing as much as 8% – 12% of wheat and corn from global food supplies.9 U.S. food prices overall are up 5.1% since the invasion with global wheat prices are up nearly 20%.10

To better appreciate the war’s impact on food and energy prices, consider the difference in changes between Headline and Core Inflation. The difference between the two is that Headline Inflation (CPI) includes food and energy prices in its measurement; Core Inflation does not. While Core Inflation peaked in March 2022—and has had a slowly declining growth rate since—the same cannot be said for Headline Inflation, which hit 40-year highs in May 2022 (see Exhibit C). 

Exhibit C: Year-over-year Headline and Core Inflation began moving in different direction from one another in March 2022.11


Supply chain stress and refinery capacity

In addition to the aforementioned underinvestment in refinery capacity over the past several decades, global refinery capacity has remained constrained for other reasons. A 2019 explosion at a Philadelphia area refinery took 335,000 in barrels per day (bpd) capacity off the market and reversed two full years’ of capacity gains for U.S.12 Additionally, the closing of a large refinery in Lousiana due to damages sustained from Hurricane Ida removed another 255,600 bpd of refinery capacity.13 But arguably the biggest impact to global refinery capacity is due to COVID-related shutdowns in what is already probably the world’s largest refiner: China. Experts estimate approximately one-third of the country’s 18 million bpd in refinery capacity is currently off-line due to COVID shutdowns.14

The economic impact of China’s COVID-related shutdowns isn’t limited to reductions in refinery capacity. China, the world’s largest manufacturer and a key contributor to global supply chains, is struggling to contain a rise in coronavirus infections (challenging that nation’s “zero-COVID” policy and related public narrative). Shanghai, a city of 25 million people and one of China’s largest manufacturing and export hubs, is under an indefinite citywide lockdown.15 An estimated 63% of Japanese-owned factories in Shanghai remain idle; another 28% are running at less than 30% capacity.16 Subsequently, Chinese exports have fallen from $340 billion USD in December 2021 to a low of $217 billion in March 2022; they’ve since slightly recovered to $273 billion at the end of April 2022.17

However, and perhaps ironically, manufacturing challenges in China haven’t necessarily resulted in empty warehouses in the United States. U.S. business inventories are higher today than they were pre-pandemic; they bottomed in June 2020 and have been rising steadily since. Consequently, today’s inflation narrative is better characterized not as a situation of “too many dollars chasing too few goods”, but more so as a situation of the goods simply being in the wrong place at the wrong time. Major retailers like Target and Walmart are now struggling with bloated inventories—a strong sign that inflation should soon begin to moderate.18

Exhibit D: Are goods in the wrong place at the wrong time? Business inventories have risen significantly since June 2020.19


What about the impact of quantitative easing and COVID-related stimulus spending?

“For every problem there is a solution that is simple, neat—and wrong.”
Quote attributed to H. L. Mencken

No analysis of today’s high inflation would be complete without considering the inflationary impact of quantitative easing and COVID-related stimulus spending. There is a long-held view in monetary economics that printing money out of thin air (aka, “quantitative easing”) and government spending (to the degree that it’s financed by deficits) both cause inflation. These arguments seem logical enough. All things equal, more money, chasing the same amount of goods and services, should lead to inflation. However, in the real world all things are not equal; the global economy is infinitely complex and constantly in motion. And even if this world were simple and less dynamic, the truth remains that economics is, even under the best of circumstances, a highly inexact science. Therefore, the evidence in our view suggests not that quantitative easing and COVID-related spending haven’t contributed to inflation—they probably have to some degree—but that such arguments are likely overstated due to the simple fact that the assumptions at the root of such arguments don’t hold in the real world.


Quantitative easing (“QE”)

The problem with arguments touting QE as a root cause of inflation is that they’re often predicated on assumptions that don’t hold in the real world. Take, for example, the Global Financial Crisis (the “GFC”) from 2007—2009. Never could economists have designed a better test of this theory. From 2008 – 2014 the U.S. Federal Reserve printed approximately $4.5 trillion out of thin air to inject into the U.S. economy—all to combat the economic impacts of the GFC. Economic theory—specifically, the monetarist view that argues QE causes inflation—predicted inflation would surge. Only it didn’t. Despite trillions in new money creation, from 2009 – 2014, year-over-year inflation fell to 0.76% annually (from an average annual rate of 2.52% from 2000 – 2009).20

So why didn’t QE in the aftermath of the GFC cause inflation? Economists have identified a plethora of potential reasons why inflation failed to materialize—everything from the deflationary impact of China’s economic rise to powerful productivity gains due to rapid advances in technology—all of which resulted in a decline in the velocity of money in the U.S. economy. Consequently, economists today believe this decline in money velocity­—a critical measure of how often dollars change hands throughout the economy—to be the primary reason why quantitative easing has failed to cause significant inflation. If money is sitting in checking accounts and bank vaults, and isn’t changing hands via economic transactions, then it’s not bidding up prices. In the aftermath of the GFC, quantitative easing should have caused inflation—in theory—had money velocity remained constant. Only it didn’t; in fact, money velocity has declined significantly since 2000. It fell further, indeed quite dramatically, during the pandemic and has yet to recover (see Exhibit E). In short, our “all things equal” assumption failed to hold. Why? Because the real world is messy and doesn’t sit still.

Exhibit E: The velocity of money declined significantly over the past 20 years. It fell further still during the pandemic and has yet to recover. Separately, there is no evidence that money velocity is mean-reverting, suggesting we should not expect it to return to its pre-2000 or even Pre-2020 levels.21

But none of this is to argue that the Fed’s pandemic-related quantitative easing isn’t contributing to inflation. Indeed, the Fed took interest rates to near zero in March 2020 and launched an aggressive bond buying program whereby it injected trillions into U.S. financial markets. It’s hard to imagine a world where so much money creation isn’t inflationary on some level. Consider the significant impact QE has had on home prices over the past few years. Since home prices (shelter) make up nearly one-third of the Consumer Price Index, any impact QE might have on home prices would be significant. For example, the interest rate on the 30-year mortgage fell nearly 30% to a low of 2.67% by the end of 2020; it rose only slightly to 3.1% by the end of 2021. As the Fed suppressed interested rates, it subsequently fueled a surge in asset prices, but especially residential home prices; home prices rose nearly 40% nationally between January 2020 and May 2022.22 For existing homeowners who do not intend to move, this rise in home prices is arguably immaterial (other than perhaps some related wealth effects); for renters or those in the market to purchase homes, the inflationary impact of QE is very real.


Pandemic-related stimulus

To reiterate, none of this is to argue that quantitative easing and the $5 trillion in stimulus spending isn’t contributing to contemporary inflation; it probably is, to some degree, especially in certain product markets such as real estate and used vehicles. However, a significant amount of pandemic-related spending went towards simply keeping the economy afloat—i.e., sustaining demand and not necessarily expanding it (see Exhibit H). Recall that the U.S. economy contracted at a 32.9% annualized rate in Q2 2020—in dollar terms, the economy shrunk by over $2 trillion in Q2 2020 alone. Funding for things like unemployment benefits, compensation for furloughed airline industry and transit employees, and paycheck protection programs arguably did little to nothing to fuel inflation but instead helped stop the economy from falling into a deflationary collapse (the U.S. economy experienced deflation in April and May 2020).

Did Congress and the Fed overshoot? Probably. Were there businesses and households who received stimulus funds who didn’t need it? Certainly. But, at least in retrospect, it looks like the Fed and Congress got it mostly right. The economy stabilized, began recovering in Q3 2020, and employment quickly rebounded with unemployment plummeting to near 50-year lows. The third quarter of 2020 saw real GDP growth of 33.4%, a powerful recovery by any measure that came quickly on the heels of Q2 2020’s record-setting contraction. Yet it took nearly a year—not until April 2021—before any hint of inflationary pressures began showing up in consumer prices. Whether one considers that a win or not is obviously subjective; economics offers no guidance there. But the facts remain that the economic recession experienced between February 2020 – April 2020 was both the shortest and sharpest in modern economic history (it lasted two months during which GDP fell a staggering 19.4%). Therefore, when we consider the steep decline in GDP and money velocity during the pandemic, it seems unlikely that COVID-related stimulus spending is a significant contributor to today’s inflation; and if it is, it’s certainly not the only contributor.

Exhibit F: Of the $5 trillion in pandemic stimulus, a significant amount went towards sustaining demand, not increasing it.23



To conclude, any analysis of today’s high inflation must begin with the fact that it is global in nature; it is not a uniquely U.S. problem. Consequently, its causes are likewise global in nature; it’s not believable that Fed policy or U.S. deficit spending would cause inflation in places as far away as Iran, Pakistan, Russia, and many nations throughout sub-Saharan Africa. While quantitative easing and pandemic-related spending may be contributors to today’s high inflation, its biggest causes are likely a combination of COVID-induced economic shutdowns and re-openings; significant global supply chain disruptions; Russia’s invasion of Ukraine and its subsequent impact on food and energy prices; and limited global refining capacity.


Part III: Implications for Fed Policy and Investors

1 Source: International Monetary Fund –
2 Ibid.
3 Source: Consumer Price Index, December 2021.
4 Source: FactSet, Inc.
5 Source: FactSet, Inc.
6 JP Morgan Guide to the Markets. June 22, 2022. Slide 29.
7 See Moody’s Inside Economics: Lousy Inflation & Life Lessons with Mark Zandi, Ryan Sweet, and Chris deRitis, June 11, 2022.
8 Global Supply Chain Pressure Index (GSCPI), Federal Reserve Bank of New York
9 “The war in Ukraine triggered a global food shortage”, The Brookings Institution. June 14, 2022
10 US Bureau of Labor Statistics; YCharts, Inc.
11 “News Release: Bureau of Labor Statistics”, June 10, 2022, p.2
12 “Philadelphia refinery closing reverses two years of US capacity gains”, Reuters, July 5, 2019
13 “US oil refinery capacity down in 2021 for second year”, Reuters, June 21, 2022
14 “Massive Oil Refining Capacity Idle in China as Prices Soar”, Bloomberg, June 19, 2022
15 “Shanghai’s lockdown is making the supply chain look like 2020 again”, Quartz, April 11, 2022
16 “The Pace of China’s Trade Slowdown Is Coming Into Focus”, Bloomberg, May 9, 2022
17 Source: Statista, 2022.
18 “Wood Sees Huge Inventories as Evidence Inflation Will Ebb”, Bloomberg, June 8, 2022
19 Source: Federal Reserve Bank of St. Louis – FRED
20 Source: YCharts, Inc.
21 Source: Federal Reserve Bank of St. Louis
22 Source: YCharts, Inc.
23 Parlapiano, et. al., “Where $5 Trillion in Pandemic Stimulus Money Went”, The New York Times, March 11, 2022

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