So they passed on the higher input costs more quickly to final goods prices. And customers, eager to finally buy what they wanted, paid the higher prices. As a result, the impact on inflation of the energy and agricultural price shocks was faster, larger and more widespread than our models suggested.
In sum, since we started inflation targeting in the early 1990s, we have not been hit by large negative supply shocks at the same time as our economy was overheating. The lesson from 2022 is that even if long-term inflation expectations are well anchored, when the economy is in excess demand, businesses raise their prices more quickly and by more when their costs increase.