High inflation is a global problem: US policy choices are not responsible

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

nation Inflation accelerated
JPN -0.0016
Nor 0.014173
who – which 0.01475
National League for Democracy (NLD) 0.01691
Gulf Research Center 0.01806
From 0.018085
ITA 0.019159
Mexico 0.022772
he gave 0.023085
BEL 0.02426
ESP 0.024595
Cor 0.026003
COLE 0.027358
lux 0.02815
ISR 0.0285
DNA 0.030457
AUTO 0.031292
Average Non-American 0.031292
Can 0.033041
SWE 0.033199
FIN 0.033758
GBR 0.03608
IRL 0.036566
Average Non-American 0.036831
United States of America 0.038027
SVN 0.040865
ISL 0.042115
Lion 0.042944
PRT 0.051002
she 0.054954
he is 0.064302
pee 0.065441
CHL 0.065947
LTU 0.069453
SVK 0.076997
June 0.1101539
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