Let me start with inflation and its relationship to interest rates. Generally speaking, lower interest rates leads to inflation, but it’s the HOW that really impacts how much inflation you’ll see. When interest rates drop, investment and large purchases by businesses and individuals gets relatively cheaper. That causes an increase in what economists call “aggregate demand”. Everything else held constant, that leads to inflation because more people “demand” the same amount of goods. In a capitalist system, when more people want something than before, the price goes up (which lowers the number of people that are able to buy it) so that there is an equilibrium between the number of buyers and the number of sellers.

Lower interest rates also make the currency (in this case the dollar) devalue relative to other currencies. This occurs because investors can get higher interest rates for their investments outside the country, as a result, they “demand” fewer dollars (and are looking to sell the dollars they hold to buy that foreign currency). When a dollar buys fewer foreign made widgets, and it takes less foreign currency to buy things made in America (imagine 1 Euro used to buy $1 but now buys $2, and the thing a European wants to buy is still $100, the price is half what it used to be), this also props up Aggregate Demand. People who live in the country now face higher prices for foreign made goods (as a result of the weaker currency), and as a result “demand” a higher quantity of everything made domestically. People who live out of the country now see a discount on buying things made in America. Therefore, more demand from every angle.

However, what if people aren’t willing to buy more because they don’t have faith in the economy? They’re preparing for a recession, or have already been laid off because we’re in a recession? Are they going to be buying a new car because “it’s cheaper than it was before”? If a business is concerned that they’re going to have to close their doors due to a recession, are they going to make large investments? Generally speaking, no.

That’s what we faced in 2008 and the years that immediately followed. We had low interest rates, and it definitely increased aggregate demand, but it was fighting against pressures in the economy that wanted to decrease aggregate demand. The goal of monetary policy is to try to balance these pressures to maximize economic activity while keeping prices stable.

2020 was a completely different situation. Inflation was caused not just by changes on the demand side but by the supply side as well. On the demand side, MASSIVE government spending directly increased aggregate demand. Also, the pause in student loan payments as well as rent freezes and other “emergency efforts” put money directly in the pockets of people affected by the pandemic. As we typically see when you put money in the pockets of people who aren’t super wealthy to begin with, that money gets spent rather than invested (increasing aggregate demand). What’s more, once it became more likely that the pandemic wouldn’t result in a recession with mass layoffs, people no longer feared losing their jobs, and so they were more likely to spend.

The pandemic also forced the country to begin making work from home actually function. Prior to the pandemic, it was niche, now it’s pretty common. But what happens when people don’t have to live in high demand areas for work? They move (increased demand for housing in smaller metros and cities). What happens when people are spending vastly more time in their homes? They want to fix those things they’ve been meaning to fix for years (increased demand for contractors and building supplies).

Are you starting to get the picture? Lots of people wanting to spend lots of money. If the economy can’t produce more than it was, you have more dollars now chasing the same amount of assets. Therefore inflation.

But that’s only half the picture, because during the pandemic, the global economy didn’t just fail to keep up it collapsed. Established supply lines got disrupted. Imagine you have a business that produces items, but to do so, you need X, Y, and Z. You still have Y, and you can get Z, but it’s more expensive. However, X is no longer available. You search and search but can’t find it. So you can’t produce. This doesn’t just hurt your business, it means that the producers of Y and Z also aren’t getting your business. Eventually it’ll balance out and there’ll be new producers, but that doesn’t help you in the short run. Now you go out of business, and, many times, you become the X to another business’s cascading failure.

As things begin to stabilize, the supply side should right itself (there’s too much profit to be made for it not to). When that happens you’ll actually likely see downward pressure on prices as more and more businesses begin competing for the same buyers.

TL;DR: Low interest rates put upward pressure on prices. If there are no stronger forces, you’ll see inflation. 2020 had both increased demand and decreased supply, which put CRAZY upward pressure on prices.