How COVID-19 and Geopolitics Created Inflation Crisis

In 2022 the global economy was reeling from the combined shocks of COVID-19 and the Russia-Ukraine war, sending inflation to record highs. Central banks initially responded to the pandemic by flooding markets with liquidity through quantitative easing (QE). While this prevented immediate economic collapse, it also masked structural weaknesses. Firms with inefficient operations papered over their problems with easy debt rather than making necessary reforms. The result was a sky-high corporate debt levels that left many companies vulnerable to interest rates rise.

This artificial lifeline had unintended consequences. Cheap capital led to increased investment in technology and labor, with companies avoiding layoffs even when market conditions didn’t justify it. The hiring spree created an extremely competitive labor market, pushing wages upward. Higher wages, in turn, fed into inflation as businesses passed on costs to consumers. Meanwhile, supply chain disruptions from China’s extended lockdowns to the Russia-Ukraine war’s impact on energy and food exports drove prices of essentials even higher.

Compounding the problem, labor supply constraints emerged as workforce participation lagged behind demand. Despite economic uncertainty, corporate profits have soared, suggesting that firms are capitalizing on inflated prices rather than improving productivity. This imbalance of rising wages, supply shortages, and record profits has created a feedback loop where inflation becomes self-reinforcing.

Employment levels were peaking, but not as a sign of true economic health. Many jobs were sustained by debt-fueled growth rather than genuine demand, leaving the labor market precariously positioned. As central banks hiked interest rates to curb inflation, the risk of a sharp correction loomed.

The road ahead requires careful recalibration. Policymakers must balance inflation control with avoiding a debt crisis, while businesses need to shift from artificial growth to sustainable productivity. Without structural reforms, today’s employment highs could quickly become tomorrow’s economic lows.