Explaining hoarding for the Post-COVID inflation for goods

The U.S. economic situation has stumped many economists as inflation since the COVID-19 pandemic continues to defy simple explanations. In 2021, the Federal Reserve Board believed inflation was transitory and due primarily to supply chain glitches, yet starting in March 2022, the Fed would begin the most rapid pace of rate hikes in 40 years in attempts to bring inflation under control. To the surprise of most economists and many executives, the Fed’s strategy has worked, as inflation has moved back toward the Fed’s long-term target while the economy has avoided falling into a recession. Inflation levels have especially cooled in the goods sector, where inflation for producers of final-demand goods and consumers has averaged less than 2% year-over-year growth since June 2023.

Given interest rate increases primarily operate through demand reduction mechanisms, this implies explanations suggesting that resolving supply chain snarls is the primary reason for cooling inflation cannot be correct. Raising interest rates reduces demand, but it cannot resolve. As such, something else must be at work. In this article, we advance an alternative explanation for the successful cooling of inflation for goods that highlights the role of a hoarding mentality as a key driver of the inflation dynamics we observed for goods from 2021 through 2023. Our explanation is inherently more demand-centric, showing why raising interest rates has brought goods inflation under control.

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