A cross-country analysis of the recent inflation spike

The global nature of the current inflation spike

In this commentary, Almuzara et al. analyze monthly inflation data covering 1980-2023 for sixteen OECD countries: Austria, Belgium, Canada, Denmark, France, Germany, Ireland, Italy, Japan, the Netherlands, Norway, Spain, Sweden, Switzerland, the United Kingdom, and the United States. They construct a global inflation measure by following the OECD practice of aggregating national inflation rates using weights based on their share of private final consumption expenditures across households and non-profit institutions in purchasing power parity terms. Their main conclusion:

When we estimate inflation persistence using measures that include food and energy prices, most of the change in global inflation persistence is broad-based. By contrast, when we use core measures, about half of the increase (but less than half of the decrease since the peak) originates in domestic, country-specific movements.

Is the Recent Inflationary Spike a Global Phenomenon?
By: Martín Almuzara, Babur Kocaoglu, Argia Sbordone – Federal Reserve Bank of New York

The role of labor markets in the recent inflationary spike

In this paper, Ben Bernanke and Olivier Blanchard, provide a comprehensive analysis of the inflation dynamics during the pandemic era across eleven economies, including the United States and ten other advanced economies. Similarly to Almuzara et al. above, they also find that the initial surge in inflation during the pandemic era was primarily driven by a series of adverse relative price shocks and sectoral shortages. These shocks had a strong but largely transient effect on inflation. However, the authors argue, as the effects of relative price shocks and shortages stabilized or reversed, the tightness in labor markets became a more significant factor. Increased labor market tightness eventually produced limited but sustained pressure on inflation, suggesting that some slowing of economic activity might be necessary to bring inflation back to target levels. Bernanke and Blanchard’s cross-country comparison findings:

United States

• Initial Impact: The U.S. labor market experienced a significant shock at the onset of the pandemic, with a sharp increase in unemployment.
  Recovery: The labor market gradually tightened, with the vacancy-unemployment ratio increasing significantly by 2023Q2, indicating a tighter labor market than pre-pandemic levels.
• Inflation Dynamics: Initially, labor market tightness had little effect on inflation, but as price shocks stabilized, the tight labor market began to exert more sustained pressure on inflation.

Euro Area

• Initial Impact: The euro area saw a similar pattern of labor market tightening, though the degree varied across member countries.
• Recovery: By 2023Q2, the labor market was tighter than pre-pandemic levels in most euro area countries.
• Inflation Dynamics: The contribution of labor market conditions to inflation was generally limited, with price shocks playing a more significant role.

United Kingdom

• Initial Impact: The UK labor market was already tight before the pandemic, which partly explains the higher inflation compared to the US and euro area.
• Recovery: The labor market remained tight throughout the pandemic, contributing to sustained inflationary pressures.
• Inflation Dynamics: The tight labor market had a more pronounced effect on inflation in the UK compared to other countries.

Japan

• Initial Impact: Japan’s labor market did not tighten as much as other countries, with the vacancy-unemployment ratio remaining relatively stable.
• Recovery: The labor market conditions in Japan showed little change, and the country experienced lower inflation rates.
• Inflation Dynamics: The main price shocks in Japan came from food rather than energy, and the labor market played a minimal role in inflation dynamics.

Germany

• Initial Impact: Germany experienced a moderate tightening of the labor market.
• Recovery: By 2023Q2, the labor market was tighter than pre-pandemic levels.
• Inflation Dynamics: The contribution of labor market conditions to inflation was limited, with price shocks being the primary drivers.

France

• Initial Impact: France saw a significant tightening of the labor market.
• Recovery: The labor market was tighter than pre-pandemic levels by 2023Q2.
• Inflation Dynamics: Similar to other euro area countries, price shocks were the main drivers of inflation, with labor market conditions playing a secondary role.

Italy

• Initial Impact: Italy experienced a tightening of the labor market.
  Recovery: The labor market was tighter than pre-pandemic levels by 2023Q2.
• Inflation Dynamics: The contribution of labor market conditions to inflation was limited, with price shocks being more significant.

Spain

• Initial Impact: Spain saw a tightening of the labor market.
• Recovery: The labor market was tighter than pre-pandemic levels by 2023Q2.
• Inflation Dynamics: Similar to other euro area countries, price shocks were the main drivers of inflation, with labor market conditions playing a secondary role.

Netherlands

• Initial Impact: The Netherlands experienced a significant tightening of the labor market.
• Recovery: The labor market was tighter than pre-pandemic levels by 2023Q2.
• Inflation Dynamics: The contribution of labor market conditions to inflation was limited, with price shocks being more significant.

Belgium

• Initial Impact: Belgium’s labor market tightened significantly.
• Recovery: The labor market was tighter than pre-pandemic levels by 2023Q2.
• Inflation Dynamics: Despite widespread wage indexation, the pass-through of wage inflation to price inflation was limited, with price shocks being the primary drivers.

Canada

• Initial Impact: Canada experienced a significant tightening of the labor market.
• Recovery: The labor market was tighter than pre-pandemic levels by 2023Q2.
• Inflation Dynamics: Similar to the US, the tight labor market began to exert more sustained pressure on inflation as price shocks stabilized.

An Analysis of Pandemic-Era Inflation in 11 Economies
Authors: Ben Bernanke, Olivier Blanchard
From: Peterson Institute for International Economics