Macroeconomic policies for inflation post COVID-19

Lessons learned from monetary and fiscal policies enacted in Australia during COVID-19 that were implemented to stabilise the domestic economy.

Lessons learned from macroeconomic policies introduced in Australia during COVID-19.

29 April 2024

Lockdown | Post-lockdown | Lessons learned | Download report | How we can help

The COVID-19 health crisis was unprecedented, leading to immediate policy responses that tried to limit economic scarring and support economic recovery. Decisions made by government at all levels and the RBA were done in a highly charged environment of public fear and uncertainty, and with limited information on the health, economic and social ramifications on the consequences of these decisions.

Macroeconomic policies for inflation

Lessons learned from the COVID-19 pandemic

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Lockdown caused both demand and supply shocks

In the face of a global pandemic, the like not seen for 100 years, governments around the world implemented measures to help stem the transmission of the coronavirus, including lockdowns. These actions shut down many sectors of the economy, especially those sectors involving human contact, such as accommodation and food services, arts and recreation services.

Many businesses were forced to close, causing workers to lose their jobs and receive lower income, pushing down aggregate demand in the process. This act of stopping an economy from functioning normally – by simply restricting the operating hours of some businesses – resulted in a multitude of shocks to both the demand and supply-sides of the economy.

Post-lockdown surges in inflation

The uncertainty, and to some extent, hysteria associated with the pandemic, created the impetus for governments and central banks to adopt a range of policy measures aimed at stabilising businesses and households. Some of these policy initiatives were new and novel, and therefore untried, while some were from the standard fiscal and monetary policy playbooks adopted in previous crises.

This imbalance between demand and supply led inflation to rise rapidly, particularly in developed economies, from mid-2021; which was further exacerbated by supply chain problems in early 2022 as a result of the commencement of geopolitical unrest, pushing up prices of oil, natural gas, fertiliser, and food.

Lessons learned for the future

Supply side shocks should not be taken lightly
With recent research into the post-COVID inflation surge showing supply plays a dominant role in driving inflation, it highlights the importance of monitoring closely the supply side of the economy and not discounting the possibility of a supply shock persisting.
Managing money supply is vital
Quantitative Easing in action on its own is not inflationary, but it can become so if agents in the economy, including banks, households, firms, and governments are able and willing to respond to lower interest rates.
Extraordinary monetary policy has distributional impacts
Conventional and unconventional monetary policy responses enacted during the pandemic did have wealth distribution consequences that further exacerbated inequality in Australia largely based on property ownership.
Monetary policy does more than just influence housing investment and property prices
Research has revealed a strong and robust negative relationship between company-specific interest rates and their investments – a relationship that is hard to identify using aggregate time-series data.
Fiscal policies should align with and provide support for monetary policy
Fiscal support that is aligned with monetary policy stance can help avoid interest rates being too high and output going into deep contraction.

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Macroeconomic policies for inflation: lessons learned from COVID-19

KPMG Office of the Chief Economist

Macroeconomic policies for inflation: lessons learned from COVID-19

KPMG Office of the Chief Economist

How KPMG can help

KPMG Economics Group

KPMG’s Economics group helps clients leverage economic insight to inform public policy decisions through clear, concise and tailored analysis to our clients’ needs. We cut through complexity to concentrate on the essentials.

If we can help your business navigate the current business environment and plan for future developments facing the industry, please contact us.

Dr Brendan Rynne

Partner, Chief Economist

KPMG Australia

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Dr Michael Malakellis

Senior Economist & Principal Director