How Inflation Radically Changes Economic Ideas

The unexpected resurgence of inflation is a slap in the face, telling us that the consensus ideas of economic policy are wrong and need to change. Fortunately the "new" ideas we need are well tested and sitting on the shelf. Inflation comes when aggregate demand exceeds aggregate supply. The source of demand is not hard to find: in response to the pandemic's dislocations, the US government sent about $5 trillion in checks to people and businesses, $3 trillion of it newly printed money, with no plans for repayment. Other countries enacted similar fiscal expansions and reaped inflation in proportion. Supply is more contentious. Supply did shrink during the pandemic. But inflation spiked after the pandemic was largely over, and many "supply shock" industries were producing as much as before but could not keep up with demand.