What can inflation-strugglers learn from inflation-killers?
Why America, Australia, Britain and Canada are lagging behind
Could the nightmare be over? Across the OECD club of rich countries, consumer-price inflation fell from a peak of 10.7% in October 2022 to 6.2% in September. The latest data from America and Britain offer more encouragement. And wage growth is slowing. As a consequence, share prices are rising. Investors hope that the world has turned a corner and that central bankers will soon cut interest rates.
Yet they may be getting ahead of themselves. Last year The Economist calculated a measure of “inflation entrenchment”. We found that the disease, symptoms of which first appeared in America, was infecting the whole rich world. We have repeated the analysis, looking at core inflation, unit labour costs, “inflation dispersion”, inflation expectations and Google search behaviour. We rank ten countries on each indicator, then combine the rankings to form an “inflation-entrenchment” score.
Overall, the data show that inflation is entrenched, maybe more so than in 2022. The country with the worst score then, Canada, would have been only third-worst now. Things are not looking good in the Anglosphere, even after recent improvements. But there are bright spots, such as Italy and Spain. In Japan and South Korea, the war might be nearly over. What can strugglers learn from the inflation-killers?
Start with the problem countries. In Australia, our worst performer, the jobs market is on fire. Over the past year labour costs, measured by how much employers pay workers to produce a unit of output, have risen by a chunky 7.1%—faster than in any other country sampled. Nor does anywhere else have more “inflation dispersion”, which we define as the share of consumer prices across the economy that are rising by more than 2% year on year.
Other Anglophone countries have different problems. Data from researchers at the Federal Reserve Bank of Cleveland, Morning Consult, a data firm, and Raphael Schoenle of Brandeis University provide a cross-country gauge of what people expect to happen with prices. Canadians think that consumer prices will rise by 5.7% over the next year, the most of any country in our sample. Canadians are also googling terms related to inflation most often. America does not do very badly on any measure. Equally, it does not do very well.
Inflation’s stickiness may reflect the fact that fiscal stimulus across Anglophone countries in 2020-21 was about 40% more generous than in other rich places. It was also more focused on handouts such as stimulus cheques than on measures to keep businesses alive, which may have further stoked demand. Indeed, a new paper by Robert Barro of Harvard University and Francesco Bianchi of Johns Hopkins University finds evidence for a link between fiscal expansion during the COVID-19 pandemic and subsequent inflation.
Monetary policy is another factor at work. When COVID struck, central banks in America, Australia, Britain and Canada reduced interest rates by one percentage point on average, twice as big a cut as in other countries in the rich world. This extra stimulus may have pushed up inflation. In the past year or so English-speaking countries have also received lots of migrants, which in the short term can be inflationary, because new arrivals compete for housing, driving up rents. Estimates by Goldman Sachs, a bank, imply that Australia’s current annualised net migration rate of 500,000 people is raising inflation by around half a percentage point.
So why are countries elsewhere doing better? Japanese people expect prices to rise by just 1.5% over the next year; South Koreans have better things to do online than to search for information about inflation. Recent history could play a role in explaining this. Before COVID-19, rich Asian countries had lived with low inflation for so long that it may have seemed a natural state of affairs. Therefore, following a jump in inflation in 2021-22, behaviour may have shifted in a disinflationary direction more quickly. By contrast, in places like Britain, which experienced inflation surges in 2008, 2011 and 2017, people may have developed a more inflationary mindset.
In Europe, inflation expectations have fallen a long way from their peak. The picture is particularly rosy in parts of the continent. Owing to a combination of policy and luck, energy price rises were not as sharp last year in Italy and Spain as in other countries, which may have prevented people from anticipating further inflation.
France, with a perkier economy, is somewhere between the Anglosphere and Asia. Germany is a different story. Once, its workers were known for their pay restraint. Now, with an uber-tight jobs market, unit labour costs are rising by over 7% a year. Price dispersion is also unusually high. In what will be a source of satisfaction in many European capitals, German economists are increasingly looking at southern European countries with envy.
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