Universality of Higher Inflation

July 29, 2008

In the year since the financial market crisis surfaced, on-year rates of inflation have changed more drastically than on-year rates of GDP growth.  The United States, Euroland, Japan, Australia and Sweden have experienced similar advances in inflation ranging between 2.1 percentage points and 2.4 ppts.  British inflation accelerated by 1.4 percentage points.  Canadian inflation increased similarly if one abstracts away the dampening effect of a national GST tax reduction but by 0.9 ppts otherwise.  Real GDP growth from a year earlier rose by 1.0 percentage point in the United states and half a percentage point in Canada, but fell by 0.5 ppts in Euroland and a tenth of a percentage point in Japan.

As one would expect, inflation accelerated more sharply in emerging markets, where commodities comprise a heavier weight in the typical consumer’s purchasing budget.  Especially higher pick-ups in inflation occurred in the Middle East of 11.7 percentage points in Egypt, 14.5 ppts in Pakistan, and 6.2 ppts in Saudi Arabia.  Inflation accelerated by 5.9 ppts in Indonesia, 4.7 ppts in Hong Kong, 6.3 ppts in Malaysia, and 4.9 ppts in Taiwan.  Surprisingly, in South America, which suffered bouts of hyperinflation during the last century, inflation has intensified less severely, for example by 2.4 percentage points in Brazil, 1.3 ppts in Mexico and just half a percentage point in Argentina.

Higher inflation than a year ago is unrelated to tighter credit conditions.  A second and simultaneous shock to all economies was delivered by the rapid rise of energy and food costs.  It is extremely doubtful that commodity prices will replicate the jump from a year ago during the coming twelve months.  That is why inflation forecasts generally project some deceleration.  On the other hand, economic activity will still be depressed by several factors in 3Q09.  Unlike the past year, I expect to see a greater change occur in economic growth rates than in inflation between now and a year from now.


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