Key points:
- An international comparison between OECD countries shows that rising inflation is a global phenomenon, not unique to the United States.
- This fact strongly argues that high inflation in the United States was not driven by any single American policy, nor by the American Rescue Plan and other generous tax cuts during the recession and the resurgence of the pandemic, nor by anything else centered around. on the United States.
- Some have argued that the global rise in inflation means that many countries, including the United States, have overstimulated their economies and generated excess aggregate demand. But this explanation is not supported by the data. Countries with the largest falls in unemployment over the past 18 months have not experienced major inflation peaks.
Consumer price data for June 2022 showed another month of rapid inflation, with headline inflation up 9.1% yoy and core inflation (which does not include energy price volatility and of foodstuffs), up 5.9%. This level of inflation has obviously become an important political issue this year. However, this problem resonates politically, as does an economic a common narrative blaming the Biden administration and its political choices for causing inflation is deeply misleading.
This is not simply a case of clearing the Biden administration’s choices: how the recent inflationary explosion will be interpreted will have enormous consequences on the response of policymakers. A strong chorus of influential economic and political analysts continues to emphasize the need for the Federal Reserve to continue to sharply raise interest rates to slow growth to “hold back” inflation. This approach risks dire consequences and threatens to put aside the extraordinary political outcome of a full recovery of jobs from the pandemic recession.
In the COVID-19 recession, the economy lost over 22 million jobs. But by June 2022 (after 28 months), the level of employment in the United States corresponded to the last month before the pandemic (February 2020). Compare this to the growth in employment after the Great Recession of 2008-09, when it took more than six years (75 months) to regain the just under 9 million lost jobs and reach pre-recession employment levels. The much faster recovery from the COVID-19 recession was significantly driven by a much more aggressive fiscal policy response.
This more aggressive fiscal response is often attributed to the outbreak of inflation over the past 18 months. The most compelling evidence that questions this interpretation is a comparison of inflation between the United States and a large set of other rich countries that have undertaken a wide range of fiscal responses. Despite differing fiscal responses, essentially all of these countries have experienced a rapid acceleration in core inflation. This means that today’s inflation is Not a uniquely US problem, and therefore unrelated to the necessary and effective economic policies that have driven the rapid economic recovery we are witnessing today.
In Figure A, we focus on core inflation (excluding energy and food prices) because it is widely considered a better target for basing decisions on macroeconomic stabilization. Energy and food prices are not only volatile, they are also fixed in global markets, which means that their price changes provide very little information on whether the US economy is currently experiencing macroeconomic imbalances. It is also useful to highlight core inflation because many comments have argued that inflation in other advanced economies is overwhelmingly affecting energy and food prices and much less about core prices. This statement is not supported by the data in Figure A.
As Figure A shows, all but one of the Organization for Economic Co-operation and Development (OECD) countries experienced an acceleration in core inflation. More significantly, this international comparison tells us that the United States is not an outlier in its experience with accelerating core inflation (the only obvious outlier in these data, Turkey, is currently experiencing higher than 40% and is not included in the figure). The US is on the higher side of inflation experiences, but far from the top and not much above the average (or even the median) of all other OECD countries. The result of the figure is clear: a global phenomenon – accelerating inflation – requires a global explanation and “Biden policies” obviously do not provide it.
The acceleration of inflation is global: Difference in core inflation rates from December 2020 to May 2022 compared to “normal” pre-pandemic 2-year inflation
| Village | Acceleration of inflation |
|---|---|
| JPN | -0.0016 |
| NEITHER | 0.014173 |
| THAT | 0.01475 |
| NLD | 0.01691 |
| GRC | 0.01806 |
| BETWEEN | 0.018085 |
| IT | 0.019159 |
| MEX | 0.022772 |
| ING | 0.023085 |
| NICE | 0.02426 |
| ESP | 0.024595 |
| COR | 0.026003 |
| WITH THE | 0.027358 |
| LUX | 0.02815 |
| ISR | 0.0285 |
| DNK | 0.030457 |
| AUT | 0.031292 |
| Non-US median | 0.031292 |
| POWER | 0.033041 |
| EVS | 0.033199 |
| FIN | 0.033758 |
| GBR | 0.03608 |
| IRL | 0.036566 |
| Non-US media | 0.036831 |
| United States | 0.038027 |
| SVN | 0.040865 |
| ISL | 0.042115 |
| LVA | 0.042944 |
| PRT | 0.051002 |
| HUN | 0.054954 |
| East | 0.064302 |
| POLO SHIRT | 0.065441 |
| CHL | 0.065947 |
| LTU | 0.069453 |
| SVK | 0.076997 |
| CZE | 0.101539 |
The following data can be saved or copied directly into Excel.
Note: We calculate the “acceleration” of inflation as post-pandemic inflation minus “normal” pre-pandemic inflation. Post-pandemic inflation is constructed as the annualized rate of change in core CPI from December 2020 to May 2022. Pre-pandemic “normal” inflation is constructed from 2018 and 2019 data for each country.
sources: Inflation data from the Organization for Economic Co-operation and Development (OECD).
Some have argued that the global rise in inflation is actually just evidence that the excess demand growth they see as driving inflation is also global. Of course, this perspective also provides a small relief for American politicians: if every advanced country in the entire world has made similar political decisions, then it seems difficult to argue that the American approach was an avoidable mistake. But another cut in international data casts doubt on a simple story of macroeconomic imbalances driving the surge in global inflation. In particular, countries with the largest decline in unemployment over the past 18 months did not experience major inflation peaks.
In Figure B below, the vertical axis is the acceleration of core inflation from the pre-pandemic trend we showed earlier in Figure A. On the horizontal axis, we subtract the average unemployment rate for March-May 2022 from the average unemployment rate prevailed in 2018-2019. This can be taken as an indicator of how much unemployment has improved in a country in the recent period compared to pre-pandemic conditions. The higher the number on the horizontal axis, the lower the current unemployment compared to pre-pandemic averages. If we interpret today’s lower-than-pre-pandemic unemployment as evidence of strong demand growth, one would expect to see a positive relationship between improving unemployment (horizontal axis) and accelerating inflation (vertical axis). But there isn’t such a significant relationship (in fact, there is a weak relationship the other way around, with countries with higher unemployment than in pre-pandemic times seeing higher inflation).
This finding should further complicate the claim that the “macroeconomic warming” argument should simply be applied globally. And if there is no strong evidence that today’s global inflation is simply driven by global excess demand, the gains from strong demand containment could be quite small, and the damage caused by this rather large.
The acceleration of inflation is global, regardless of unemployment rates : Accelerating inflation and accelerating unemployment among OECD countries
| Village | Improvement of unemployment | Acceleration of inflation |
|---|---|---|
| AUT | 0.005583 | 0.031292 |
| NICE | 0.004167 | 0.02426 |
| POWER | 0.006292 | 0.033041 |
| CHL | -0.00345 | 0.01475 |
| WITH THE | -0.01532 | 0.065947 |
| CRI | -0.02307 | 0.027358 |
| CZE | -0.00263 | 0.101539 |
| ING | 0.002333 | 0.023085 |
| DNK | 0.004667 | 0.030457 |
| ESP | 0.014125 | 0.024595 |
| East | -0.00567 | 0.064302 |
| FIN | 0.008167 | 0.033758 |
| BETWEEN | 0.014917 | 0.018085 |
| GBR | 0.001542 | 0.03608 |
| HUN | 0.000375 | 0.054954 |
| IRL | 0.005083 | 0.036566 |
| ISL | -0.00129 | 0.042115 |
| ISR | 0.002024 | 0.0285 |
| IT | 0.020292 | 0.019159 |
| JPN | -0.00171 | -0.0016 |
| COR | 0.010917 | 0.026003 |
| LTU | 0.001333 | 0.069453 |
| LUX | 0.013417 | 0.02815 |
| LVA | 0.002458 | 0.042944 |
| MEX | 0.000871 | 0.022772 |
| NLD | 0.013833 | 0.01691 |
| NEITHER | 0.007792 | 0.014173 |
| POLO SHIRT | 0.009208 | 0.065441 |
| PRT | 0.009667 | 0.051002 |
| SVK | -0.00138 | 0.076997 |
| SVN | 0.008 | 0.040865 |
| EVS | -0.01021 | 0.033199 |
| United States | 0.010833 | 0.038027 |
The following data can be saved or copied directly into Excel.
Note: We calculate the “acceleration” of inflation as post-pandemic inflation minus “normal” pre-pandemic inflation. Post-pandemic inflation is constructed as the annualized rate of change in core CPI from December 2020 to May 2022. Pre-pandemic “normal” inflation is constructed from 2018 and 2019 data for each country. We calculate accelerated unemployment the same way.
sources: inflation and unemployment data from the Organization for Economic Co-operation and Development (OECD).
Rather than the specific policies of the Biden administration driving inflation, the roots of today’s inflation are a more complicated cocktail of other forces: from the spike in commodity, energy and commodity prices due in large part to the Russian invasion of Ukraine, to the Persistent supply chain disruptions and distorted patterns of consumer demand resulting from the pandemic. These shocks and their unexpectedly large ripple effects are the global explanation for the rise in inflation.
Again, this is not an academic exercise or simply a political cover for a particular policy maker. Instead, there is a real economic danger from a misdiagnosis of the inflation problem. A planned and unnecessary recession will only cause more economic pain to those still recovering from the COVID-19 recession and weaken the ongoing strong economic recovery.
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