The majority of U.S. pandemic-era inflation came from a surge in demand, but supply chain constraints stoked it further, Federal Reserve Bank of New York research shows.

About 60% of the inflation seen from 2019 to 2021 was driven by demand-side factors, with the rest stemming from supply issues, according to the analysis by the New York Fed. 

“The bottom line of this decomposition is that supply constraints magnified the impact of higher demand in inflation,” Julian di Giovanni, the head of climate-risk studies in the New York Fed’s research and statistics group, wrote in a blog post published Wednesday. 

Di Giovanni found that most sectors in the U.S. — or 58 out of 66 — were affected by supply constraints, such as worker shortages and logistics bottlenecks, during the pandemic. He estimated that without those challenges, the annual inflation rate would have reached 6% at the end of 2021, instead of 9%.  

However, demand-side factors played a bigger role in driving up prices. Fiscal and monetary support led to greater demand overall, and the “composition of demand also changed as consumers substituted from services to goods,” he said. This led to more imbalances between supply and demand, which amplified the effects of the supply constraints, the researcher said.  

“Put differently, fiscal stimulus and other aggregate demand factors would not have driven inflation this high without the pandemic-related supply constraints,” di Giovanni wrote. 

The consumer price index rose by 8.5% in July from a year earlier, down from the 9.1% annual increase seen in June, which marked a 40-year high for the inflation rate, according to data from the Labor Department.

Fed officials are aggressively raising interest rates to combat those robust price increases by lowering demand and slowing growth. The U.S. central bank lifted rates by 75 basis points in July for the second month in a row. 

Officials are likely to raise rates by either 50 basis points or 75 basis points when they meet next month, a decision policy makers say will be determined by economic data. They will be able to review one more employment report, and receive another update on consumer prices before they meet again on Sept. 20-21.