The central bank’s research points to the Covid-19 pandemic, Russia’s invasion of Ukraine and the associated policy responses as having a particular impact on supply and demand, which in turn drove inflation higher.
Covid-19 pandemic – demand outstrips
The pandemic initially triggered a sharp fall in economic activity due to the widespread lockdowns. However, as society reopened, economic activity picked up rapidly, with global demand overtaking supply. The imbalance in supply and demand was reinforced by persisting disruptions to key supply chains, which further compounded supply-side issues and thus created inflationary pressure.
Accommodative monetary and fiscal policies, which helped underpin the strong economic upswing, were the second contributory factor to rising inflation. For example, a series of compensation schemes were launched across the US and several European countries to provide relief from the pandemic and later the spike in energy prices, with Denmark, for example, paying out a hitherto frozen holiday allowance in 2021, which stimulated private consumption.
Energy and raw materials prices soar
The third inflation trigger that Danmarks Nationalbank highlights in its analysis is the war in Ukraine.
Russia’s invasion of Ukraine sent shockwaves through global and European energy markets, where prices were already on the high side.
Add to this a lack of water in Nordic reservoirs, reduced capacity at French nuclear power plants and the closure of German nuclear plants, and you have a near perfect storm for the electricity market.
Soaring energy prices in 2021 and 2022 indirectly fuelled inflation by increasing production costs.