As corporate profits improve and employee income increases, consumption and housing investment, as well as firms’ activity – including business fixed investment – becomes further rejuvenated. In other words, aggregate demand will further increase and prices will rise accordingly. A virtuous cycle of a buoyant economy and inflation will be generated (Chart 4).
So if they were the only drivers of the current high inflation, we would have seen a drop in production in the first half of the year. But we do not find this drop in the data, suggesting that demand factors must also play a role. The question is: which factors in particular?