In the past, the cause of inflation was the outcome of either cost-push or demand-pull. However, the Covid-19 pandemic is unique.
The effect of the pandemic generates both factors.
For non-economists, it's best to first understand these terms.
So-called "cost-push" inflation is a situation where firms face rising production costs. "Demand-pull" is when there is a surge in demand for goods that affect limited supply.
Before the Covid-19 pandemic, inflationary pressure around the world was relatively low, under 4%.
Similarly, Thailand enjoyed a low rate of headline inflation, where food and energy prices are included, at approximately 1% during 2018-2019.
Henceforth, inflation here refers to headline inflation as it reflects the true cost of living in which people face.
Unarguably, the Covid-19 lockdown made a huge impact on the Thai economy.
Many businesses were completely shut while a lot of employees were forced to leave their jobs.
As lockdown and Covid measures ease, employers in some sectors such as hospitality will experience labour shortages while some employees will seek higher-paying jobs.
The increase in the demand for goods and services led to higher demand for labour which inevitably pushed up wages in the fourth quarter of last year and the second quarter this year, which is a major cost of production that forces producers to raise their prices.
There are also other causes of inflation, such as soaring energy prices (ie as seen with diesel oil), and supply shortages caused by world shipment and supply chain disruption.
Covid-19 can be considered as a self-correcting process for inflation.
Before that, a low inflation rate was a point of relief for many central banks, especially for a small, open economy like Thailand, because it generated ample room for them to play with monetary policy tools to keep interest rates at desired levels.
Just before the pandemic started, a lot of central banks attempted to reverse the adverse effect of low inflation as it caused too low or negative interest rates. But many of them failed.
Meanwhile, the pandemic proved that it was able to do a better job in raising inflation rates around the world.
But why do we need to worry about rising inflation?
Generally, if inflation is within a moderate range of, eg, 3-5%, that wouldn't concern us much as we also expect our wages to go up at the same level.
However, for Covid-19 inflation, we cannot be certain if the rising inflation is temporary or prolonged.
Spiralling prices can have a huge impact on low-income people, especially those who rely on government support and those in low-paying positions.
Generally, the Bank of Thailand, via its Monetary Policy Committee (MPC), wouldn't be heavy-handed regarding inflation, instead, it uses inflation targeting to monitor the economy.
However, if inflation keeps rising, the MPC may take a bold step by raising the interest rate to curb inflation to the desired level.
This article is a part of a research project on 'Policies and Measures to Support and Prevent the Impact of Covid-19 on Labour and Employment', supported by the National Research Council of Thailand.
Nuttanan Wichitaksorn, PhD, is a visiting research adviser on the Labour Market Analytics Team at the Thailand Development Research Institute (TDRI) and senior lecturer in analytics/statistics at the Auckland University of Technology, New Zealand.