The main takeaway:
- An international comparison of OECD countries shows that rising inflation is a global phenomenon and is not unique to the United States.
- This fact argues vigorously that high inflation in the United States has not been driven by any uniquely American policy – not the US bailout and other generous financial relief during the recession and pandemic recovery nor anything else to do with the United States.
- Some have argued that the global rise in inflation meant that many countries – including the United States – overestimated their economies and generated excess aggregate demand. But this interpretation is not supported by the data. Countries that experienced a greater decline in unemployment over the past 18 months did not see a greater rise in inflation.
Consumer price data for June 2022 showed another month of rapid inflation, with overall inflation up 9.1% year over year, and core inflation (which does not include volatile energy and food prices) rising 5.9%. It is clear that this level of inflation has become a major political issue this year. But whatever the case may have resonance politically, as economic The common narrative blaming the Biden administration and its policy choices for causing inflation is deeply misleading.
This is not just an issue of exonerating the Biden administration’s choices – how the latest swell will be interpreted will have dire consequences for how policymakers respond. A vociferous chorus of influential economic analysts and policymakers continues to highlight the need for the Federal Reserve to keep raising interest rates sharply to slow growth in order to “curb” inflation. This approach risks dire consequences and threatens to undo the astonishing policy feat of fully recovering jobs from the pandemic recession.
In the recession hit by the COVID-19 virus, the economy lost more than 22 million jobs. But by June 2022 (28 months later), the level of US employment was identical to the pre-pandemic month (February 2020). Compare this to 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 align employment levels before the recession. Much faster recovery from COVID-19 recession Significantly Driven by a tougher fiscal policy response.
This more aggressive fiscal response is often blamed for rampant inflation over the past 18 months. The most compelling evidence that casts doubt on this interpretation is the comparison of inflation between the US and a large group of other rich countries that have taken a wide range of fiscal responses. Despite the different fiscal responses, all of these countries experienced a rapid acceleration in core inflation. This means that today’s inflation is Not A uniquely American problem, and therefore unrelated to the necessary and effective economic policies that drove the rapid economic recovery we are witnessing today.
in Figure A, we focus on core inflation (excluding energy and food prices) because that is widely considered a better target for making fundamental decisions about macroeconomic stability. Energy and food prices are not only volatile, but also set in world markets, which means that their price changes carry very little information about whether the US economy specifically is currently experiencing macroeconomic imbalances. It is also useful to highlight core inflation because a lot of comments have claimed that inflation in other advanced economies has more to do with energy and food prices, and much less about core prices. This claim is not supported by the data in Figure A.
As Figure A shows, all but one of the OECD countries experienced an acceleration in the core inflation rate. More importantly, this international comparison tells us that the US is no exception in its experience with accelerating core inflation (which is odd and evident in this data – Turkey – is currently experiencing inflation over 40% and is not included in the figure). The US is on the higher side of experiencing inflation, but it is far from the top and not much above the average (or even average) of all other OECD countries. The result of this figure is clear: the global phenomenon – accelerating inflation – requires a global explanation, and it is clear that Biden’s “policies” do not provide this.
Global inflation acceleration: The difference in core inflation rates from December 2020 to May 2022 compared to “normal” inflation two years before the outbreak
|who – which||0.01475|
|National League for Democracy (NLD)||0.01691|
|Gulf Research Center||0.01806|
|United States of America||0.038027|
The data below can be saved or copied directly into Excel.
Notes: We calculate “acceleration” of inflation as post-pandemic inflation minus “natural” inflation before the pandemic. Post-pandemic inflation is generated as the annual rate of change in the core CPI from December 2020 to May 2022. Pre-pandemic “natural” inflation was generated using 2018 and 2019 data for each country.
source: 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, even this perspective provides a modicum of relief for American policymakers: if every developed country in the entire world made similar policy decisions, it is hard to argue that the American approach was an avoidable mistake. But another piece of international data casts doubt on a simple story about the macroeconomic imbalances driving up global inflation. Specifically, countries that have experienced a larger decline in unemployment over the past 18 months have not experienced significant rises in inflation.
in Figure B Below, the vertical axis is the core inflation acceleration relative to the pre-pandemic trend we previously showed in Figure (a). On the horizontal axis, we subtract the average unemployment rate for the period from March to May 2022 from the average unemployment rate in 2018.–2019. This can be taken as an indication of how much unemployment in a country has improved in 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 one interprets unemployment today lower than pre-pandemic times as evidence of strong demand growth, one would expect to see a positive relationship between improvement in unemployment (horizontal axis) and acceleration of inflation (vertical axis). But there is no such significant relationship (in fact, there is a weak one on the contrary, countries with higher unemployment rates compared to pre-pandemic times experience higher inflation).
This finding should further complicate the claim that the “macroeconomic overheating” argument simply must be applied globally. And if there is no solid evidence that global inflation today is simply driven by excess global demand, the payoff from aggressively curbing demand may be very small, and the damage from this very large.
Global inflation acceleration, regardless of unemployment : Accelerating inflation and accelerating unemployment among OECD countries
|nation||improve unemployment||Inflation accelerated|
|National League for Democracy (NLD)||0.013833||0.01691|
|United States of America||0.010833||0.038027|
The data below can be saved or copied directly into Excel.
Notes: We calculate “acceleration” of inflation as post-pandemic inflation minus “natural” inflation before the pandemic. Post-pandemic inflation is generated as the annual rate of change in the core CPI from December 2020 to May 2022. Pre-pandemic “natural” inflation was generated using 2018 and 2019 data for each country. We calculate accelerated unemployment in the same way.
source: inflation and unemployment Data from the Organization for Economic Co-operation and Development (OECD).
Rather than the specific policies of the Biden administration that drive inflation, the roots of inflation today are a much more complex mixture of other forces: from the sharp rise in the prices of raw materials, energy and commodities due to the Russian invasion of Ukraine, to the ongoing disruptions in the supply chain and distorted consumer demand patterns caused by the pandemic. These shocks and their unexpectedly large cascading effects are the global explanation for rising inflation.
Again, this is not an academic exercise or merely providing political cover for any particular policy maker. Instead, there is a real economic danger of misdiagnosing the problem of inflation. An unnecessary engineering slump will only lead to more economic pain for those still just recovering from the COVID-19 recession, and will undermine the strong economic recovery underway.
Subscribe to the EPI newsletter so you don’t miss our research and insights on ways to make the economy work better for everyone.