- An international comparison of OECD countries shows that rising inflation is a global phenomenon, not just the United States.
- This fact conclusively proves that the high inflation in the US was not caused by any unique US policy – not by the American bailout and other generous financial relief during the pandemic recession and recovery, nor by anything else focused on the US.
- Some argue that the global rise in inflation means that many countries, including the US, have over-stimulated their economies and created excess aggregate demand. But this explanation is not supported by the data. Countries with larger declines in unemployment have not seen larger surges in inflation over the past 18 months.
June 2022 consumer price data showed another month of rapid inflation, with headline inflation up 9.1% year-on-year and core inflation (which excludes volatile energy and food prices) up 5.9%. This level of inflation has obviously become a major political issue this year. But, nevertheless, this issue has a political resonance, because. economic The fact is that the prevailing narrative that blames the Biden administration and its political decisions for causing inflation is deeply misleading.
This is not just an excuse to justify the Biden administration’s choice – how the recent inflationary outbreak is interpreted will have huge implications for policymakers’ responses. A loud chorus of economic analysts and influential politicians continuous selection the need for the Federal Reserve to keep raising interest rates sharply to slow growth and “curb” inflation. This approach risk dire consequences and threatens to reverse the astonishing political achievement of a full recovery of jobs from the pandemic downturn.
During the recession caused by COVID-19, the economy lost more than 22 million jobs. But by June 2022 (28 months later), the U.S. employment rate was on par with the last month before the pandemic (February 2020). Compare it with job growth after the Great Recession of 2008-2009, when it took more than six years (75 months) to restore just under 9 million lost jobs and reach pre-crisis employment levels. Much faster recovery from COVID-19 recession wash significantly controlled through a much more aggressive fiscal response.
This more aggressive fiscal response is often attributed to the inflationary spike over the past 18 months. The most compelling evidence that calls into question this interpretation is the comparison of inflation between the United States and a large set of other rich countries that have taken a wide range of fiscal responses. In spite of various fiscal responsess, core inflation accelerated rapidly in almost all of these countries. This means that today’s inflation No this is a unique US problem, and therefore not related to the necessary and effective economic policies that led to the rapid economic recovery that we are seeing today.
AT Figure A, we focus on core inflation (excluding energy and food prices) because this is widely considered the best target for macroeconomic stabilization decisions. Energy and food prices are not only volatile, they are also dependent on world markets, which means that their price changes carry very little information about whether the US economy is currently experiencing macroeconomic imbalances. It’s also useful to highlight core inflation because there are a lot of comments. declared that inflation in other advanced economies is overwhelmingly dependent on energy and food prices, and much less on underlying prices. This claim is not supported by the data in Figure A.
As shown in Figure A, all but one of the Organization for Economic Co-operation and Development (OECD) countries saw an acceleration in core inflation. More importantly, this international comparison tells us that the US is no exception in its experience of accelerating core inflation (one obvious outlier in this data, Turkey, is currently experiencing over 40% inflation and is not included in the figure). The US is at a higher rate of inflation, but far from the top and not much above the average (or even median) of all other OECD countries. The result of this figure is clear: the global phenomenon – the acceleration of inflation – requires a global explanation, and the “Biden policy” clearly does not provide this.
Accelerating inflation is global: Difference in core inflation from December 2020 to May 2022 compared to “normal” inflation 2 years before the pandemic.
|Median outside the US||0.031292|
|Average outside the US||0.036831|
Notes: We calculate the “acceleration” of inflation as post-pandemic inflation minus “normal” pre-pandemic inflation. Post-pandemic inflation is calculated as the annual rate of change in the core CPI from December 2020 to May 2022. Pre-pandemic “normal” inflation is calculated based on 2018 and 2019 data for each country.
Source: Organization for Economic Co-operation and Development (OECD) inflation data.
Some argue that the global rise in inflation is really just evidence that the excess growth in demand, which they see as driving inflation, is also global. Of course, even this point of view justifies American politicians to some extent: if all the developed countries around the world made similar political decisions, then it is difficult to argue that the American approach was a mistake that could have been avoided. But another cut in international data calls into question the simple story of macroeconomic imbalances driving global inflation. In particular, countries with larger declines in unemployment over the past 18 months have not seen larger spikes in inflation.
AT Figure B below on the vertical axis is the acceleration of core inflation relative to the pre-pandemic trend shown earlier in Figure A. On the horizontal axis, the average unemployment rate for March-May 2022-2019 is subtracted from the average unemployment rate that prevailed in 2018. This can be seen as an indicator of how much unemployment has improved in a country over the recent period compared to pre-pandemic conditions. The higher the number on the horizontal axis, the lower the current unemployment rate compared to pre-pandemic averages. If we interpret unemployment, which is lower today than in pre-pandemic times, as evidence of strong growth in demand, one would expect to see a positive relationship between improving unemployment rates (horizontal axis) and accelerating inflation (vertical axis). But there is no such significant relationship (in fact, there is a weak relationship in the opposite direction, when countries with higher unemployment compared to the pre-pandemic period have higher inflation).
This conclusion should further complicate the claim that the “macroeconomic overheating” argument should simply be applied globally. And unless there is good evidence that today’s global inflation is simply caused by excess global demand, the gains from sharp demand containment may be quite small, and the damage is pretty big.
Accelerating inflation is global, regardless of the unemployment rate : Accelerated inflation and accelerated unemployment in OECD countries
|Country||Improving unemployment||Accelerating inflation|
Notes: We calculate the “acceleration” of inflation as post-pandemic inflation minus “normal” pre-pandemic inflation. Post-pandemic inflation is calculated as the annual rate of change in the core CPI from December 2020 to May 2022. Pre-pandemic “normal” inflation is calculated based on 2018 and 2019 data for each country. In the same way, we calculate accelerated unemployment.
Source: Inflation and unemployment data from the Organization for Economic Co-operation and Development (OECD).
The causes of current inflation are not the Biden administration’s specific inflation-stimulating policies, but a more complex cocktail of other forces, from the surge in commodity, energy and commodity prices largely linked to the Russian invasion of Ukraine, to prolonged disruptions in supply chains and distorted consumer demand patterns driven by the pandemic. These shocks and their unexpectedly strong ripple effects are the global explanation for rising inflation.
Again, this is not an academic exercise or just a political front for any particular politician. Instead, there is a real economic danger of misdiagnosing the problem of inflation. Designed, unnecessary recession will only cause more economic pain to those just recovering from the COVID-19 recession, and undercut there is a strong economic recovery.
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