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The Anatomy of the Global Inflation Spike

The post-pandemic surge of inflation must be analyzed in its global context, with insights drawn from the notable correlations between countries - and especially between advanced economies. Only then can one properly judge major central banks' performance in managing the situation and pursuing their mandates.

NEW YORK – Persistent surges in core price inflation (which excludes food and energy), and the resulting overshoot of central-bank inflation targets, have been a distinctive and distressing feature of the post-pandemic global economic landscape. When confronted with such an economically significant phenomenon, those of us who pay attention to the relevant international evidence will look for common factors to account for the observed correlation between countries. I can think of at least three.

First, there is ample evidence to suggest that the initial surge of inflation across countries in 2021 and 2022 was triggered in part by an adverse shock to aggregate supply. Second, there was substantial (and, in the case of the United States, unprecedented) fiscal and monetary policy support, delivered first in 2020-21, to cushion the blow to economic activity and employment, and again in 2022 (especially in Europe), to offset the higher energy and food prices caused by Russia’s invasion of Ukraine.

Across the advanced economies, central banks responded to the COVID-19 shock by deploying various combinations of interest-rate cuts (or keeping rates at the effective lower bound), offering forward guidance, and expanding their balance sheets via large-scale quantitative-easing (QE) programs. Interestingly, between 2020 and 2022, there was more cross-country variation in the scale of fiscal policies than in the scale of monetary policies. While correlation is not causation, it bears mentioning that there was a much stronger correlation – at least in 2020-22 – between the cross-country fiscal response to the pandemic and cross-country inflation than there was between cross-country growth in the monetary base and inflation.