The author is the chief economist of G+ Economics

Covid-19 has overturned traditional economic theory. After a year of panic about continued growth interruption, the market was forced to deal with a new and unexpected source of volatility—continuously high inflation.

The worst contraction in history has given way to a sharp rebound in the stock market and the worst global inflation shock since the 1970s.

The only way to understand this roller coaster of economic risk is to realize that the Covid cycle is driven by extraordinary supply-side shocks, not traditional demand-led forces.

More importantly, the pandemic has accelerated structural changes in global supply infrastructure, consumption patterns, labor dynamics, and public sector balance sheets. Long after the inflationary momentum of economic reopening subsides, the impact of these forces will accompany us.

In the era of low inflation, especially since the financial crisis, policymakers usually ignore the supply side and only worry about the output gap. This is based on the expected deviation of the economy’s estimates of potential growth, such as the labor market through the perspective of idle production capacity. .

This method works well when the output capacity of the entire economy remains unchanged, consumer spending patterns are predictable, and macroeconomic results are predictable. But this is not the experience during the pandemic.

The peak of the economic recession in 2020 coincides with the complete closure of businesses, tourism and education. The company freezes orders, reduces staffing and reduces inventory. The result was a massive disruption in the supply chain, labor participation, and investment plans, leading to the slow restoration of production capacity through subsequent economic reopening.

This means that destructive structural changes have occurred in the production, delivery, and storage capabilities of various industries on a global scale, all the way to the industry supply chain. Delays in mining operations, semiconductor shortages, transportation congestion, soaring freight rates, port congestion, quarantine restrictions and trade processing backlogs all prove this.

Therefore, the current inflation data was born during the worst and worst recession in history. Traditionally, this recession has led to deflation due to economic uncertainty, rising unemployment and industrial overcapacity. Conversely, the process of large-scale divestments during the peak of the pandemic’s economic pain caused supply disruptions, pushing up prices in areas ranging from automotive touch-screen display chips to home construction wood.

Similarly, compared with the traditional recession cycle, the soaring unemployment rate caused by the growth shock of the new crown virus is far from deflation. The strengthening of unemployment insurance, school closures, and health risks limit labor force participation below pre-pandemic levels. These supply-side factors-at least in the short term-have pushed up wages, especially in industries that have been hit hardest by the pandemic, such as restaurants and hotels.

But the economic impact of Covid-19 did not end with the imbalance between supply and demand in the past year and a half. The pandemic has accelerated structural changes in business models, consumption patterns, labor dynamics, and public sector balance sheets.

Supply chain disruptions force companies to restore production capacity. The blockade has further stimulated the interaction between companies and customers and the digitization of supply chain connections. In addition, remote work has increased the commercial use of advanced cloud and online technologies.

With the adoption of new business models, old jobs were destroyed. Will not return to normal. The labor market will be divided between workers who are retraining and reforming jobs created by the pandemic and those who do not. The result is likely to be that some labor markets are too hot in terms of the company’s demand for employees with appropriate skills, while in some areas there is an oversupply of labor.

Once Covid-related financial transfers are over in the next few weeks, the K-type inequality in household income and wealth caused by the pandemic will become more pronounced.

In the context of suppressed demand and limited supply capacity, the sugar wave of the central bank and government overstimulating the economy has faded out of people’s sight, and the structural legacy of Covid-19 will be with us for a long time.