Rising inflation is a global problem: US policy choices are not to blame

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
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