Rising inflation is a global problem: U.S. policy choices are not to blame


Key takeaways:

  • An international comparison among OECD countries shows that rising inflation is a global phenomenon, not unique to the United States.
  • This fact argues strongly that high inflation in the U.S. has not been driven by any unique American policy—not the American Rescue Plan and other generous fiscal relief during the pandemic recession and recovery nor anything else U.S.-centric.
  • Some have argued that the global rise of inflation means that many countries— including the U.S.—overstimulated their economies and generated excess aggregate demand. But this explanation is not supported by the data. The countries with larger declines in unemployment over the past 18 months have not seen larger inflation spikes.

Consumer price data for June 2022 showed another month of rapid inflation, with overall inflation rising 9.1% year-over-year and core inflation (which doesn’t include volatile energy and food prices) rising by 5.9%. This level of inflation has obviously become a major political issue this year. But however this issue resonates politically, as an economic matter a common narrative that blames the Biden administration and its policy choices for causing the inflation is deeply misleading.

This is not simply a case for exonerating the Biden administration’s choices—how the recent inflationary outbreak is interpreted will have huge consequences for how policymakers respond. A loud chorus of economic analysts and influential policymakers continue highlighting the need for the Federal Reserve to continue raising interest rates sharply to slow growth to “rein in” inflation. This approach risks terrible consequences and threatens to cast aside the amazing policy achievement of a full jobs recovery 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 U.S. matched the last month pre-pandemic (February 2020). Compare this with job growth after the Great Recession of 2008-09, when it took more than six years (75 months) to regain the just under 9 million jobs lost and match pre-recession employment levels. The far 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 blamed for the inflation outbreak over the past 18 months. The most persuasive evidence casting doubt on this interpretation is a comparison of inflation between the U.S. and a large set of other rich countries that undertook a wide array of fiscal responses. Despite the different fiscal responses, essentially all of these countries have experienced a rapid acceleration of core inflation. This means that today’s inflation is not a uniquely U.S. problem, and therefore not connected to the necessary and effective economic policies that spearheaded the rapid economic recovery we see today.

In Figure A, we focus on core inflation (stripping out the prices of energy and food) because that is widely considered a better target for basing decisions about macroeconomic stabilization. Energy and food prices are not just volatile, they are also set on global markets, meaning that their price changes carry very little information about whether the U.S. economy specifically is currently experiencing macroeconomic imbalances. It’s also useful to highlight core inflation because much commentary has claimed that inflation in other advanced economies is overwhelmingly about energy and food prices, and far less about core prices. This claim is not supported by the data in Figure A.

As Figure A shows, all but one Organization for Economic Co-operation and Development (OECD) country saw an acceleration in core inflation. More significantly, this international comparison tells us that the U.S. is not an outlier in its experience with accelerating core inflation (the one obvious outlier in this data—Turkey—is currently experiencing inflation over 40% and is not included in the figure). The U.S. is on the higher side of inflation experiences, but far from the top and not that far above the average (or even the median) for all other OECD countries. The upshot of the figure is clear: A global phenomenon—accelerating inflation— demands a global explanation, and “Biden policies” obviously do not provide that.

The acceleration of inflation is global: Difference in core inflation rates from December 2020 to May 2022 compared with 2 years pre-pandemic “normal” inflation

Country Inflation acceleration
JPN -0.0016
NOR 0.014173
CHE 0.01475
NLD 0.01691
GRC 0.01806
FRA 0.018085
ITA 0.019159
MEX 0.022772
DEU 0.023085
BEL 0.02426
ESP 0.024595
KOR 0.026003
COL 0.027358
LUX 0.02815
ISR 0.0285
DNK 0.030457
AUT 0.031292
Non-US median 0.031292
CAN 0.033041
SWE 0.033199
FIN 0.033758
GBR 0.03608
IRL 0.036566
Non-US average 0.036831
USA 0.038027
SVN 0.040865
ISL 0.042115
LVA 0.042944
PRT 0.051002
HUN 0.054954
EST 0.064302
POL 0.065441
CHL 0.065947
LTU 0.069453
SVK 0.076997
CZE 0.101539
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