Understanding inflation in advanced economies | Latest News India

Almost all the advanced economies of the world are currently grappling with the question of growth and inflation. With inflation numbers breaking records, central banks and monetary hawks are raising the pitch for more radical monetary policy action to contain prices even as headwinds to growth momentum are created.

To be sure, global growth momentum is already on a downward path and the decline has come faster than expected. For example, the World Bank’s June 2022 Global Economic Outlook projects 2022 global growth at 2.9% — a sharp downward revision from the 4.1% forecast made in January 2022. Of course, the biggest change is between the January and June forecasts. Russia’s invasion of Ukraine sent commodity prices skyrocketing.

How serious is the problem of inflation in advanced economies? Is this just a by-product of the Russia-Ukraine war or is it something more? Where does politics figure into the growth and inflation debate? This two-part data journalism series will attempt to answer some of these questions. The first part gives some stylized facts about inflation and the second part looks at its political economic aspects.

The Russia-Ukraine war has increased inflation, but prices were rising before the war

The ability to manage inflation well is considered the greatest success of macroeconomic policy in advanced economies. Inflation has already fallen from very low (and normal) levels when the pandemic began in early 2020, primarily as a result of a fall in demand for various goods and services. However, as economies opened up and vaccines became available, prices began to recover. Although some of the runaway inflation was merely a base effect – an artificial boost due to low price levels in the previous period – inflation accelerated by early 2022. This is true for both the G7 countries – which include the US, UK, Japan, Italy, Germany, France and Canada – and the euro area. To put things in context, the combined GDP of the G7 and Euro Area countries accounted for 43.4% and 13.9% of world GDP by 2022.

See Chart 1: Historical inflation numbers for the G7 and the Euro area

How high are these numbers, historically speaking?

A comparison of the latest numbers for the G7 shows that inflation concerns are broad-based. The US had the highest inflation among the G7 at 8.6% for May, the highest even by historical standards. US inflation has been below this number since January 1982, Bureau of Labor Statistics (BLS) data show. Japan had the lowest inflation among the G7 for May at 2.5%, the highest since November 2014, OECD data shows. The UK’s May inflation rate of 7.9% was the highest rate since May 1991, according to data from the Organization for Economic Co-operation and Development (OECD). Canada’s May inflation of 7.7% was the highest since February 1983. French May inflation was the highest since October 1985 at 5.2%. German May inflation of 7.9% was last seen in December 1973. Italian May inflation was last seen at 6.8% in November 1990.

See Chart 2: Annual growth of inflation in individual G7 countries for May and their historical highs

US inflation is more broad-based than the euro area at the moment

Looking at the components of the CPI basket, the drivers of inflation in the US and Europe appear to be different. In the US, prices of energy, food, and other non-food and non-energy goods grew faster in May with subcategory-wise annual inflation at 34.6%, 10.1%, and 8.5%, respectively, BLS data show. In the euro area, energy, housing, water, electricity and gas, and transport prices grew faster by 39.1%, 16.3% and 14% in the same period, OECD data show.

Moreover, these inflationary pressures are more broad-based in the US than in the euro area. Indeed, items in the CPI basket such as education and communication showed negative annual growth of 0.9% and 0.4% respectively in the euro area for May, while all CPI items in the US showed positive growth. Even after excluding volatile components such as food and energy prices from the CPI, core CPI in the US grew 6% in May, while it was 3.8% in the euro area.

Harvard economist Jason Furman attributed some of the rise in core inflation in Europe to imports from the US. “Since the start of the pandemic, the US has spent an additional $600 billion on goods, which is roughly 4% of the world’s total annual goods consumption (a third of global consumption is spent on goods). In contrast, Europe has spent less than the trend on goods during that period. Higher U.S. demand coupled with global supply-chain issues are driving up costs for commodities around the world,” he wrote in a June 6 Wall Street Journal article ( https://on.wsj.com/3OE5UUw ).

See Chart 3: Core inflation in US, G7 and Euro area

This is the first in a two-part data journalism series on inflation in advanced economies. The second part looks at the political economy around inflation.

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