Currently, I see three major drivers of Inflation
Covid & the labor market
We are in the midst of the Covid Cycle called "Intermediate State". Most people will get vaccinated or will get either infected (herd immunity). The intermediate state will most likely last at least until 2024. I expect it to last longer due to Omicron and other variants yet to come. High rate of disabilities (medical, psychological damages), higher death rate, early retirement will put upward pressure on wages which will affect long term inflation. In essence, the labor to capital ratio has been shortened. Ultimately, covid will become an endemic phenomenon just like influenza.
Supply & Demand shocks
We saw a short-term uptake of demand in the transition of the immediate state to the intermediate state accompanied by supply shocks. In the immediate state companies have reduced their production due to the lockdown (layoffs in the workforce and reduction of production capacities) which puts upward pressure on prices and thus inflation. A sudden increase in prices further reduces demand (demand shock), driven by inflation to be expected to be a long-term phenomenon.
Money Supply
Over the past decades central banks have produced more money than ever. This printed money has been mostly hoarded on balance sheets of commercial and central banks (M0) (Financialization). The inflation powder keg will explode once M0 becomes true M1 Money flowing into the real economy.
The EURO zone also has a 7x higher M0 than 2008, with 6x more money than GDP.
Zero Interest Rate Policy
The cost of money has been equal since 2015, hence aggregate demand has been growing enormously due to debt (government spending below and corporate spending)
Government Spending
Aggregate demand will further drive up prices due to its multiplier effects. Though most government spendings are usually infrastructure related, these spendings end up on the balance sheets of corporations and salaries. However, these fiscal stimulus packages due to their long term bullwhip effect have not panned out in the economy so far.
