essay on global inflation

What Explains Global Inflation

Context.  After staying mostly dormant for the prior decade, global inflation has been on a rollercoaster ride over the past three years. Global inflation declined sharply in the early stages of the pandemic amid a collapse in demand and oil prices. In mid-2020, however, it started to pick up as demand bounced back, supply disruptions deepened, and oil prices rebounded. In July 2022, global inflation reached its highest level since the mid-1990s. It then began to subside but it remains significantly above the pre-pandemic average. These developments have pushed the sources of global inflation movements to the center of policy debates.

New analysis.  Against this background, this study presents the first systematic empirical analysis of the drivers of global inflation over the period of 1970-2022. It quantifies the roles played by a wide range of shocks, including shocks to global demand, global supply, oil prices, and global interest rates, in driving global inflation.

Drivers of global inflation.   Oil price shocks were the main drivers of variation in global inflation with a contribution of over 38 percent, followed by global demand shocks with a contribution of about 28 percent over the past five decades, and much smaller contributions of global supply shocks and interest rate shocks. Impulse responses also suggest a more significant role for oil prices and global demand shocks. For instance, following a positive oil price shock of around 10 percent, global inflation increases by 0.35 percentage point within a year, and 0.55 percentage point within three years.

In addition, oil price and global demand shocks were the main drivers of movements in global inflation around every global recession since 1970 (1975, 1982, 1991, 2009, and 2020). For example, in the early months of the COVID19-induced global recession of 2020, demand shocks severely depressed global inflation. Oil price and global demand shocks led the surge in global inflation between mid-2020 and mid-2022, as well as the disinflation since mid-2022.

Evolution of the drivers of global inflation.   Over time, the role of global demand shocks and oil price shocks has grown and that of global supply shocks has receded. During 2001-22, oil price and global demand shocks accounted for 65 percent of total inflation variation, up from 56 percent in the two earlier periods of 1970-85 and 1986-2000 the study examines. The contribution of global supply shocks, on the other hand, decreased to 13 percent in 2001-22, from 25 percent in the earlier periods. The importance of global interest rate shocks in driving global inflation was broadly stable at around 19-22 percent.

Drivers of different measures of global inflation.   The importance of shocks varied depending on the underlying measure of global inflation. For example, oil price shocks accounted for only 7 percent of the variation in global core CPI inflation, which excludes volatile energy and food prices. Global supply shocks explained 41 percent of global core CPI inflation variation, and global demand and interest rate shocks split the rest of the core CPI inflation variation. For global producer price index (PPI) inflation variation, the importance of oil price and global interest rate shocks was similar in magnitude to that in global CPI inflation variation. However, global supply shocks explained a slightly larger share of PPI inflation variation than CPI inflation.

Robustness.  These results are robust to a wide range of sensitivity exercises, including alternative definitions of global variables, different samples of countries, alternative sub-periods, and additional identification restrictions for shocks.

Ha, Jongrim, M. Ayhan Kose, Franziska Ohnsorge, and Hakan Yilmazkuday. 2023. “What Explains Global Inflation.” Policy Research Working Paper 10648, World Bank, Washington, DC.

The findings, interpretations, and conclusions expressed in this paper are those of the authors and should not be attributed to the World Bank, its Executive Directors, or the countries they represent.

For more information, please contact Jongrim Ha ([email protected]).

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What is inflation?

Inflation has been top of mind for many over the past few years. But how long will it persist? In June 2022, inflation in the United States jumped to 9.1 percent, reaching the highest level since February 1982. The inflation rate has since slowed in the United States , as well as in Europe , Japan , and the United Kingdom , particularly in the final months of 2023. But even though global inflation is higher than it was before the COVID-19 pandemic, when it hovered around 2 percent, it’s receding to historical levels . In fact, by late 2022, investors were predicting that long-term inflation would settle around a modest 2.5 percent. That’s a far cry from fears that long-term inflation would mimic trends of the 1970s and early 1980s—when inflation exceeded 10 percent.

Get to know and directly engage with senior McKinsey experts on inflation.

Ondrej Burkacky is a senior partner in McKinsey’s Munich office, Axel Karlsson is a senior partner in the Stockholm office, Fernando Perez is a senior partner in the Miami office, Emily Reasor is a senior partner in the Denver office, and Daniel Swan is a senior partner in the Stamford, Connecticut, office.

Inflation refers to a broad rise in the prices of goods and services across the economy over time, eroding purchasing power for both consumers and businesses. Economic theory and practice, observed for many years and across many countries, shows that long-lasting periods of inflation are caused in large part by what’s known as an easy monetary policy . In other words, when a country’s central bank sets the interest rate too low or increases money growth too rapidly, inflation goes up. As a result, your dollar (or whatever currency you use) will not go as far  today as it did yesterday. For example: in 1970, the average cup of coffee in the United States cost 25 cents; by 2019, it had climbed to $1.59. So for $5, you would have been able to buy about three cups of coffee in 2019, versus 20 cups in 1970. That’s inflation, and it isn’t limited to price spikes for any single item or service; it refers to increases in prices across a sector, such as retail or automotive—and, ultimately, a country’s economy.

How does inflation affect your daily life? You’ve probably seen high rates of inflation reflected in your bills—from groceries to utilities to even higher mortgage payments. Executives and corporate leaders have had to reckon with the effects of inflation too, figuring out how to protect margins while paying more for raw materials.

But inflation isn’t all bad. In a healthy economy, annual inflation is typically in the range of two percentage points, which is what economists consider a sign of pricing stability. When inflation is in this range, it can have positive effects: it can stimulate spending and thus spur demand and productivity when the economy is slowing down and needs a boost. But when inflation begins to surpass wage growth, it can be a warning sign of a struggling economy.

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Inflation may be declining in many markets, but there’s still uncertainty ahead: without a significant surge in productivity, Western economies may be headed for a period of sustained inflation or major economic reset , as Japan has experienced in the first decades of the 21st century.

What does seem to be changing are leaders’ attitudes. According to the 2023 year-end McKinsey Global Survey on economic conditions , respondents reported less fear about inflation as a risk to global and domestic economic growth . But this sentiment varies significantly by region: European respondents were most concerned about the effects of inflation, whereas respondents in North America offered brighter views.

What causes inflation?

Monetary policy is a critical driver of inflation over the long term. The current high rate of inflation is a result of increased money supply , high raw materials costs , labor mismatches , and supply disruptions —exacerbated by geopolitical conflict .

In general, there are two primary types, or causes, of short-term inflation:

• Demand-pull inflation occurs when the demand for goods and services in the economy exceeds the economy’s ability to produce them. For example, when demand for new cars recovered more quickly than anticipated from its sharp dip at the beginning of the COVID-19 pandemic, an intervening shortage  in the supply of semiconductors  made it hard for the automotive industry to keep up with this renewed demand. The subsequent shortage of new vehicles resulted in a spike in prices for new and used cars.
• Cost-push inflation occurs when the rising price of input goods and services increases the price of final goods and services. For example, commodity prices spiked sharply  during the pandemic as a result of radical shifts in demand, buying patterns, cost to serve, and perceived value across sectors and value chains. To offset inflation and minimize impact on financial performance, industrial companies were forced to increase prices for end consumers.

Learn more about McKinsey’s Growth, Marketing & Sales  Practice.

What are some periods in history with high inflation?

Economists frequently compare the current inflationary period with the post–World War II era , when price controls, supply problems, and extraordinary demand in the United States fueled double-digit inflation gains—peaking at 20 percent in 1947—before subsiding at the end of the decade. Consumption patterns today have been similarly distorted, and supply chains have been disrupted  by the pandemic.

The period from the mid-1960s through the early 1980s in the United States, sometimes called the “Great Inflation,” saw some of the country’s highest rates of inflation, with a peak of 14.8 percent in 1980. To combat this inflation, the Federal Reserve raised interest rates to nearly 20 percent. Some economists attribute this episode partially to monetary policy mistakes rather than to other causes, such as high oil prices. The Great Inflation signaled the need for public trust  in the Federal Reserve’s ability to lessen inflationary pressures.

Inflation isn’t solely a modern-day phenomenon, of course. One very early example of inflation comes from Roman times, from around 200 to 300 CE. Roman leaders were struggling to fund an army big enough to deal with attackers from multiple fronts. To help, they watered down  the silver in their coinage, causing the value of money to slowly fall—and inflation to pick up. This led merchants to raise their prices, causing widespread panic. In response, the emperor Diocletian issued what’s now known as the Edict on Maximum Prices, a series of price and wage controls designed to stop the rise of prices and wages (one helpful control was a maximum price for a male lion). But because the edict didn’t address the root cause of inflation—the impure silver coin—it didn’t fix the problem.

How is inflation measured?

Statistical agencies measure inflation first by determining the current value of a “basket” of various goods and services consumed by households, referred to as a price index. To calculate the rate of inflation over time, statisticians compare the value of the index over one period with that of another. Comparing one month with another gives a monthly rate of inflation, and comparing from year to year gives an annual rate of inflation.

In the United States, the Bureau of Labor Statistics publishes its Consumer Price Index (CPI), which measures the cost of items that urban consumers buy out of pocket. The CPI is broken down by region and is reported for the country as a whole. The Personal Consumption Expenditures (PCE) price index —published by the US Bureau of Economic Analysis—takes into account a broader range of consumer spending, including on healthcare. It is also weighted by data acquired through business surveys.

How does inflation affect consumers and companies differently?

Inflation affects consumers most directly, but businesses can also feel the impact:

• Consumers lose purchasing power when the prices of items they buy, such as food, utilities, and gasoline, increase. This can lead to household belt-tightening and growing pessimism about the economy .
• Companies lose purchasing power and risk seeing their margins decline , when prices increase for inputs used in production. These can include raw materials like coal and crude oil , intermediate products such as flour and steel, and finished machinery. In response, companies typically raise the prices of their products or services to offset inflation, meaning consumers absorb these price increases. The challenge for many companies is to strike the right balance between raising prices to cover input cost increases while simultaneously ensuring that they don’t raise prices so much that they suppress demand.

How can organizations respond to high inflation?

During periods of high inflation, companies typically pay more for materials , which decreases their margins. One way for companies to offset losses and maintain margins is by raising prices for consumers. However, if price increases are not executed thoughtfully, companies can damage customer relationships and depress sales —ultimately eroding the profits they were trying to protect.

When done successfully, recovering the cost of inflation for a given product can strengthen relationships and overall margins. There are five steps companies can take to ADAPT  (adjust, develop, accelerate, plan, and track) to inflation:

• Adjust discounting and promotions and maximize nonprice levers. This can include lengthening production schedules or adding surcharges and delivery fees for rush or low-volume orders.
• Develop the art and science of price change. Instead of making across-the-board price changes, tailor pricing actions to account for inflation exposure, customer willingness to pay, and product attributes.
• Accelerate decision making tenfold. Establish an “inflation council” that includes dedicated cross-functional, inflation-focused decision makers who can act quickly and nimbly on customer feedback.
• Plan options beyond pricing to reduce costs. Use “value engineering” to reimagine a portfolio and provide cost-reducing alternatives to price increases.
• Track execution relentlessly. Create a central supporting team to address revenue leakage and to manage performance rigorously. Traditional performance metrics can be less reliable when inflation is high .

Beyond pricing, a variety of commercial and technical levers can help companies deal with price increases in an inflationary market , but other sectors may require a more tailored response to pricing.

Learn more about our Financial Services , Industrials & Electronics , Operations , Strategy & Corporate Finance , and  Growth, Marketing & Sales Practices.

How can CEOs help protect their organizations against uncertainty during periods of high inflation?

In today’s uncertain environment, in which organizations have a much wider range of stakeholders, leaders must think about performance beyond short-term profitability. CEOs should lead with the complete business cycle and their complete slate of stakeholders in mind.

CEOs need an inflation management playbook , just as central bankers do. Here are some important areas to keep in mind while scripting it:

• Design. Leaders should motivate their organizations to raise the profile of design  to a C-suite topic. Design choices for products and services are critical for responding to price volatility, scarcity of components, and higher production and servicing costs.
• Supply chain. The most difficult task for CEOs may be convincing investors to accept supply chain resiliency as the new table stakes. Given geopolitical and economic realities, supply chain resiliency has become a crucial goal for supply chain leaders, alongside cost optimization.
• Procurement. CEOs who empower their procurement  organizations can raise the bar on value-creating contributions. Procurement leaders have told us time and again that the current market environment is the toughest they’ve experienced in decades. CEOs are beginning to recognize that purchasing leaders can be strategic partners by expanding their focus beyond cost cutting to value creation.
• Feedback. A CEO can take a lead role in playing back the feedback the organization is hearing. In today’s tight labor market, CEOs should guide their companies to take a new approach to talent, focusing on compensation, cultural factors, and psychological safety .
• Pricing. Forging new pricing relationships with customers will test CEOs in their role as the “ultimate integrator.” Repricing during inflationary times is typically unpleasant for companies and customers alike. With setting new prices, CEOs have the opportunity to forge deeper relationships with customers, by turning to promotions, personalization , and refreshed communications around value.
• Agility. CEOs can strive to achieve a focus based more on strategic action and less on firefighting. Managing the implications of inflation calls for a cross-functional, disciplined, and agile response.

A practical example: How is inflation affecting the US healthcare industry?

Consumer prices for healthcare have rarely risen faster than the rate of inflation—but that’s what’s happening today. The impact of inflation on the broader economy has caused healthcare costs to rise faster than the rate of inflation. Experts also expect continued labor shortages in healthcare—gaps of up to 450,000 registered nurses and 80,000 doctors —even as demand for services continues to rise. This drives up consumer prices and means that higher inflation could persist. McKinsey analysis as of 2022 predicted that the annual US health expenditure is likely to be $370 billion higher by 2027 because of inflation.

This climate of risk could spur healthcare leaders to address productivity, using tech levers to boost productivity while also reducing costs. In order to weather the storm, leaders will need to quickly set high aspirations, align their organizations around them, and execute with speed .

What is deflation?

If inflation is one extreme of the pricing spectrum, deflation is the other. Deflation occurs when the overall level of prices in an economy declines and the purchasing power of currency increases. It can be driven by growth in productivity and the abundance of goods and services, by a decrease in demand, or by a decline in the supply of money and credit.

Generally, moderate deflation positively affects consumers’ pocketbooks, as they can purchase more with less money. However, deflation can be a sign of a weakening economy, leading to recessions and depressions. While inflation reduces purchasing power, it also reduces the value of debt. During a period of deflation, on the other hand, debt becomes more expensive. And for consumers, investments such as stocks, corporate bonds, and real estate become riskier.

A recent period of deflation in the United States was the Great Recession, between 2007 and 2008. In December 2008, more than half of executives surveyed by McKinsey  expected deflation in their countries, and 44 percent expected to decrease the size of their workforces.

When taken to their extremes, both inflation and deflation can have significant negative effects on consumers, businesses, and investors.

For more in-depth exploration of these topics, see McKinsey’s Operations Insights  collection. Learn more about Operations consulting , and check out operations-related job opportunities  if you’re interested in working at McKinsey.

Articles referenced:

• “ Investing in productivity growth ,” March 27, 2024, Jan Mischke , Chris Bradley , Marc Canal, Olivia White , Sven Smit , and Denitsa Georgieva
• “ Economic conditions outlook during turbulent times, December 2023 ,” December 20, 2023
• “ Forward Thinking on why we ignore inflation—from ancient times to the present—at our peril with Stephen King ,” November 1, 2023
• “ Procurement 2023: Ten CPO actions to defy the toughest challenges ,” March 6, 2023, Roman Belotserkovskiy , Carolina Mazuera, Marta Mussacaleca , Marc Sommerer, and Jan Vandaele
• “ Why you can’t tread water when inflation is persistently high ,” February 2, 2023, Marc Goedhart and Rosen Kotsev
• “ Markets versus textbooks: Calculating today’s cost of equity ,” January 24, 2023, Vartika Gupta, David Kohn, Tim Koller , and Werner Rehm  
• “ Inflation-weary Americans are increasingly pessimistic about the economy ,” December 13, 2022, Gonzalo Charro, Andre Dua , Kweilin Ellingrud , Ryan Luby, and Sarah Pemberton
• “ Inflation fighter and value creator: Procurement’s best-kept secret ,” October 31, 2022, Roman Belotserkovskiy , Ezra Greenberg , Daphne Luchtenberg, and Marta Mussacaleca
• “ Prime Numbers: Rethink performance metrics when inflation is high ,” October 28, 2022, Vartika Gupta, David Kohn, Tim Koller , and Werner Rehm
• “ The gathering storm: The threat to employee healthcare benefits ,” October 20, 2022, Aditya Gupta , Akshay Kapur , Monisha Machado-Pereira , and Shubham Singhal
• “ Utility procurement: Ready to meet new market challenges ,” October 7, 2022, Roman Belotserkovskiy , Abhay Prasanna, and Anton Stetsenko
• “ The gathering storm: The transformative impact of inflation on the healthcare sector ,” September 19, 2022, Addie Fleron, Aneesh Krishna , and Shubham Singhal
• “ Pricing during inflation: Active management can preserve sustainable value ,” August 19, 2022, Niels Adler and Nicolas Magnette
• “ Navigating inflation: A new playbook for CEOs ,” April 14, 2022, Asutosh Padhi , Sven Smit , Ezra Greenberg , and Roman Belotserkovskiy
• “ How business operations can respond to price increases: A CEO guide ,” March 11, 2022, Andreas Behrendt ,  Axel Karlsson , Tarek Kasah, and  Daniel Swan
• “ Five ways to ADAPT pricing to inflation ,” February 25, 2022,  Alex Abdelnour , Eric Bykowsky, Jesse Nading,  Emily Reasor , and Ankit Sood
• “ How COVID-19 is reshaping supply chains ,” November 23, 2021,  Knut Alicke ,  Ed Barriball , and Vera Trautwein
• “ Navigating the labor mismatch in US logistics and supply chains ,” December 10, 2021,  Dilip Bhattacharjee , Felipe Bustamante, Andrew Curley, and  Fernando Perez
• “ Coping with the auto-semiconductor shortage: Strategies for success ,” May 27, 2021,  Ondrej Burkacky , Stephanie Lingemann, and Klaus Pototzky

This article was updated in April 2024; it was originally published in August 2022.

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The rise in global inflation – the hit to living standards across the world

Analysis: From Pakistan to the US, Australia to Germany, the cost of living is rising to new highs and causing new hardships

• US inflation reaches 40-year high at 7.5%
• Rolling coverage of the latest economic and financial news

After decades lurking in the shadows, inflation is back. On Amazon, you can find fridge magnets printed with words spoken 40 years ago by Ronald Reagan , before the election that swept him into the White House.

“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”

Price spirals remain a real fear for many Americans, particularly those who lived through the double-digit inflation suffered under Reagan’s predecessor Jimmy Carter.

What was a painful but distant memory is now a new reality. And it is global. The Bureau of Labor Statistics announced on Thursday that the consumer price index rose year on year by 7.5% in January, a level not seen since the 1980s. Britain is not far behind, with prices rising by 5.4% at the end of last year. In the eurozone – the 19 countries using the euro – it hit 5.1% in January, the highest level since records began in 1997 .

Here, the Guardian’s foreign correspondents report on how inflation is denting living standards around the world.

For years New Yorkers looking for a cheap eat have been able to rely on a $1 slice of pizza. Not for long. As inflation soars even the cheap slice is under pressure and many of the city’s famous pizza shops are imposing price hikes to combat rising costs for everything from tomato sauce and pepperoni to labour and cardboard pizza boxes.

US inflation hit its fastest pace since 1982 in January, pushing prices up at a 7.5% annual rate , the third straight month in which inflation exceeded an annualised rate of 6%.

Supply chain issues coupled with rising demand continue to inflate the price of fuel, rent, food, and other essentials. The average price of a used car in the US was $28,205 (£20,782) at the end of December, according to Cox Automotive, the first time the median price of a second-hand vehicle has surpassed $28,000.

Price rises have hit everyone but inflation hits poorer Americans hardest. The lowest-earning fifth of Americans already spend 83% of their income on housing, according to the labor department’s Consumer Expenditure Survey, and can ill-afford increases in rents, let alone fuel, food, and other essentials.

The Federal Reserve is now preparing to raise interest rates in the hope of taming soaring prices. But with inflation surging worldwide it remains to be seen how soon, or whether, the central bank will succeed.

Dominic Rushe in New York

Italians have been feeling the knock-on effects of inflation mostly in their utilities bills, with gas and electricity costs rising by more than 50% this winter. In turn, the high energy costs have made it more expensive to run factories and transport goods, hence price rises have also been felt in other areas, such as food and manufactured goods.

Preliminary data from Istat, Italy’s statistics agency, earlier this month showed inflation rose by 3.9% during 2021, hitting 4.2% in December – the highest rise in over a decade. The Bank of Italy predicts inflation at 2.8% this year, although businesses are forecasting higher price rises at 3.2%.

Italy has not produced nuclear energy for more than three decades and is extremely dependent on energy imports.

“We are highly dependent on imported energy, hence why from this point of view Italy is more vulnerable than other countries,” said Marcello Messori, an economics professor at Luiss University in Rome.

“In the short term, there will be a great impact on utilities’ bills,” he added, while forecasting that Europe’s green and digital transition plan could impact prices further down the line. “I am in favour of the two transitions but in Europe we are under-assessing the possible medium-term impact.”

Angela Giuffrida in Rome

Inflation in Germany is currently around 4.9%, down on December’s 5.3% – which was only the second time it has exceeded 5% since reunification in 1990 – and is expected to remain high at least until the middle of the year. The Bundesbank referred to a ‘consistent extremely high price pressure’ in its January monthly report.

There are multiple reasons behind the inflation rate, including supply chain issues, price rises to reflect losses linked to the pandemic, high demand for specific goods and services coupled with a labour shortage, as well as a rise in the VAT rate, after it was temporarily reduced to help businesses last year.

The most shocking hikes are for heating, petrol, diesel, electricity, and oil – which according to the consumer price index have increased on average by 18.3%, butin some cases by as much as 50%.

On the grocery bill, consumers are paying around 6% more, but with big differences between goods. Potatoes are the big surprise, having risen by around 43% year on year, mainly due to bad weather conditions. Other food stuffs such as tomatoes, salad, milk, salad, onions and eggs have recorded considerable price rises of between 5% and 20%.

In general, imports to Germany have increased in price by around 21% – the steepest rise since 1980 – mainly due to supply chain issues linked to the pandemic.

While wages are expected to rise too, with trade unions insisting on appropriate increases , lower-income families are being hardest hit. Despite a 20% rise in the minimum wage, many are not expected to feel enough of a lift to be able to make up for the higher cost of living.

Kate Connolly in Berlin

For a commodity-based economy, Australia faces more of an uphill battle to keep a lid on prices than most.

Consumer inflation accelerated at the end of 2021 to 3.5%, while the underlying rate watched by the central bank – Reserve Bank of Australia (RBA) – rose to its highest level since mid-2014 at 2.6% . Record high fuel prices were one factor.

The RBA’s monk-like forbearance to resist lifting the official cash rate from its record low 0.1% until wages start to rise at least 3% annually will be under the spotlight with financial markets already pricing in the first hike in rates by June . By next February, the rate could be as high as 1.25%, futures indicate.

A rate-rise delay until June, though, would at least avoid embarrassing the federal government, which must hold a national election on or before 21 May.

Private economists are less hawkish but doubt the RBA can hold off beyond August. One issue to watch is whether the jobless rate dips below 4% which would be the lowest since 1974 although there are many reasons why wages growth may remain restrained including the relatively weak bargaining position of labour .

Peter Hannam in Sydney

The global wave of inflation has brought Pakistan to its knees. The rate soared to 13% in January, just as the national currency, the rupee, is rapidly devaluing.

Food prices have skyrocketed by 17%, leaving lower- and middle-income families, who already spent half their income on food, struggling to cope. The country has recorded a recent 5% rise in the price of potatoes, a 4.5% rise in the price of chicken and a 2.5% rise in the cost of bananas. The price of cooking oil has risen by 27% in the past three years and sugar now costs more than fuel. In January, for the first time in Pakistan’s history, petrol hit 150 rupees a litre (63 pence), a hike of around 40%.

Local policy decisions have aggravated global pressures. The government has agreed cost-cutting measures with the International Monetary Fund (IMF) in order to secure a $6bn bailout, which includes levies on petrol and higher energy tariffs and higher taxes. The cost of electricity in Pakistan is already double that of its neighbours India and Bangladesh.

Amid mass discontent and anger at the now unaffordable cost of living, Prime Minister Imran Khan recently said that the impact of inflation “kept me up at night” but insisted it was a “global phenomenon”. An anti-inflation protest march is now being planned by the political opposition.

Hannah Ellis-Petersen in Delhi

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The Return of Global Inflation

Carmen reinhart, clemens graf von luckner.

*This piece originally appeared in Project Syndicate on February 11, 2022

Today's inflationary surge is being felt not just by the advanced economies but also by the majority of emerging markets and developing economies. And though its causes vary across countries, the task of resolving the problem ultimately will fall to the world's major central banks.

Inflation has come back faster, spiked more markedly, and proved to be more stubborn and persistent than major central banks initially thought possible.   After initially dominating headlines in the United States, the problem has become a centerpiece of policy discussions in many other advanced economies. In 15 of the 34 countries classified as AEs by the International Monetary Fund’s World Economic Outlook, 12-month inflation through December 2021 was running above 5%. Such a sudden, shared jump in high inflation (by modern standards) has not been seen in more than 20 years.

Nor is this inflationary surge limited to wealthy countries. Emerging markets and developing economies have been hit by a similar wave, with 78 out of 109 EMDEs also confronting annual inflation rates above 5%. That share of EMDEs (71%) is about twice as large as it was at the end of 2020. Inflation thus has become a global problem – or nearly so, with Asia so far immune.

The primary drivers of the inflation spike are not uniform across countries, particularly when comparing AEs and EMDEs. Diagnoses of “overheating,” prevalent in the US discourse, do not apply to many EMDEs, where fiscal and monetary stimulus in response to COVID-19 was limited, and where economic recovery in 2021 lagged well behind the AE rebound.

 In the meantime, the resurgence of inflation will continue to reinforce inequality, both within and across countries.

Moreover, the pandemic-induced bust-and-recovery patterns differ markedly across country income groups, with recovery being defined as an economy’s return to its 2019 level of per capita income. About 41% of high-income AEs met that threshold at the end of 2021, compared to 28% of middle-income EMDEs and just 23% of low-income countries.

But the disparity between advanced and developing economies is even greater than this comparison suggests, because many EMDEs were already experiencing declines in per capita income before the pandemic, whereas AEs were mostly at new highs.  While many EMDEs have marked down their estimates of potential output over the past two years, there is little to suggest that their inflationary pressures are driven primarily by overheating in the aftermath of significant policy stimulus.

One development that is common across advanced and developing economies is the increase in commodity prices alongside rising global demand.  As of January 2022, oil prices were up 77% from their December 2020 level.

Another major issue affecting advanced and developing economies alike is global supply chains, which continue to be severely affected by the events of the past two years. Transport costs have skyrocketed. And unlike the oil-based supply shock of the 1970s, the COVID-19 supply shocks are more diverse and opaque, and therefore more uncertain, as the World Bank’s most recent Global Economic Prospects stresses.

In EMDEs, currency depreciation (owing to lower inflows of foreign capital and downgrades of sovereign credit ratings) has contributed to inflation among imported goods. And because inflation expectations in EMDEs are less anchored and more attune to currency movements than in AEs, the passthrough from exchange rates to prices tends to be faster and more pronounced.

Another important factor is food price inflation. During 2021, 12-month increases in food prices exceeded 5% in 79% (86 out of 109) of EMDEs.   While AEs have not been immune to rising food prices, just 27% of them experienced price hikes exceeding 5%.

Worse, food price inflation also generally hits lower-income countries (and lower-income households everywhere) particularly hard, which makes it tantamount to a regressive tax. Food accounts for a much larger share of the average household consumption basket in EMDEs, which means that inflation in those economies is likely to prove persistent. Today’s higher energy prices will translate directly into higher food prices tomorrow (through higher costs for fertilizer, transport, and so forth).

Although most EMDEs no longer have fixed exchange rates – as they did during the inflation-prone 1970s – the scope for “truly independent” monetary policy in small open economies remains limited, floating exchange rates notwithstanding. The risk of them importing inflation from the global financial centers is not some relic of the past.

Indeed, the most salient feature of today’s inflation is its ubiquity. In the absence of global policy options to resolve supply-chain disruptions, the task of addressing inflation is left to the major central banks.  While the US is poised to undergo a modest tightening (by historical standards) in 2022, this is unlikely to be sufficient to rein in price growth. As Kenneth Rogoff and I document in a 2013 paper, much of the inflation persistence of the 1970s stemmed from the US Federal Reserve’s tendency to do too little, too late (until Paul Volcker’s arrival).

To be sure, a more timely and robust policy response from major central banks would not be good news for EMDEs in the short run. Most would experience higher funding costs, and debt crises could become significantly more likely for some. Nonetheless, the longer-term costs of delaying action would be greater. Because the US and other advanced economies failed to tackle inflation quickly during the 1970s, they ultimately needed far more draconian policies, which led to America’s second-deepest post-war recession, along with a developing-country debt crisis.

As the old saying goes, “A stitch in time saves nine.” In the meantime, the resurgence of inflation will continue to reinforce inequality, both within and across countries.

• Agriculture and Food
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Former Senior Vice President and Chief Economist of the World Bank Group

PhD Candidate, Sciences Po Paris; Economist, World Bank

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Inflation has risen around the world, but the U.S. has seen one of the biggest increases

Note: For the latest data on this topic, read our 2022 blog post .

Americans who have been to the grocery store lately or started their holiday shopping may have noticed that consumer prices have spiked. The annual rate of inflation in the United States hit 6.2% in October 2021, the highest in more than three decades, as measured by the Consumer Price Index (CPI). Other inflation metrics also have shown significant increases in recent months, though not to the same extent as the CPI.

Understanding why the rate of inflation has risen so quickly could help clarify how long the surge might last – and what, if anything, policymakers should do about it. The recent acceleration in the rate of inflation appears to be fundamentally different from other inflationary periods that were more closely tied to the regular business cycle. Explanations for the current phenomenon proffered to date include continuing disruptions in global supply chains amid the coronavirus pandemic; turmoil in the labor markets; the fact that today’s prices are being measured against prices during last year’s COVID-19-induced shutdowns; and strong consumer demand after local economies were reopened.

With the U.S. rate of inflation running higher than it has at any time since the end of the Cold War, Pew Research Center decided to compare the U.S. experience to those of other countries, especially its peers in the developed world.

The Center relied primarily on data from the Organization for Economic Cooperation and Development, most of whose 38 member states are highly developed democracies. The OECD collects a wide range of data about its members, facilitating cross-national comparisons. We chose to use quarterly rate of inflation measures, both because they’re less volatile than monthly figures and because they were available for all OECD countries. This data also was available for eight non-OECD countries with sizable national economies, so we included them in the analysis as well.

For each country, we calculated year-over-year inflation rates going back to the first quarter of 2010 (except for Argentina, where no data was available before 2018) and ending in the third quarter of this year. We also calculated how much those rates had risen or fallen since the start of the COVID-19 pandemic in the first quarter of 2020.

To get a sense of longer-term inflation trends in the U.S., we analyzed two separate measures: The Consumer Price Index Retroactive Series (R-CPI-U-RS) from the Bureau of Labor Statistics and the Personal Consumption Expenditures Price Index from the Bureau of Economic Analysis.

At least one thing is clear: A resurgent inflation rate is by no means solely a U.S. concern. A Pew Research Center analysis of data from 46 nations finds that the third-quarter 2021 inflation rate was higher in most of them (39) than in the pre-pandemic third quarter of 2019. In 16 of these countries, including the U.S., the inflation rate was more than 2 percentage points higher last quarter than in the same period of 2019. (For this analysis, we used data from the Organization for Economic Cooperation and Development, a group of mostly highly developed, democratic countries. The data covers the 38 OECD member nations, plus eight other economically significant countries.)

At 5.3%, the U.S. had the eighth-highest annual inflation rate in the third quarter of 2021 among the 46 countries examined, narrowly edging out Poland. The increase in the U.S. inflation rate – 3.58 percentage points between the third quarter of 2019 and the third quarter of 2021 – was the third highest in the study group, behind only Brazil and Turkey , both of which have substantially higher inflation rates in general than the U.S. does.

Regardless of the absolute level of inflation in each country, many show variations on the same pattern: relatively low inflation before the COVID-19 pandemic struck in the first quarter of 2020; flat or falling inflation for the rest of that year and into 2021, as many governments sharply curtailed most economic activity; and rising inflation in the second and third quarters of this year, as the world struggled to get back to something approaching normal.

For most countries in this analysis, 2021 has marked a sharp break from what had been an unusually long period of low-to-moderate inflation. In fact, during the decade leading up to the pandemic, 34 of the 46 countries in the analysis averaged changes in inflation rates of 2.6% or lower. In 27 of these countries, inflation rates averaged less than 2%. The biggest exception was Argentina, whose economy has been plagued by high inflation and other ills for decades . The OECD has no data on Argentine inflation rates before 2018, but in the 2018-19 period it averaged 44.4%.

At the other end of the spectrum is Japan, which has struggled against persistently low inflation and periodic deflation, or falling prices, for more than two decades, mostly without success. In the first quarter of 2020, Japan’s inflation rate was running at an anemic 0.7%. It slid into deflationary territory in the last quarter of 2020 and has remained there since: Consumer prices in the third quarter of this year were 0.2% below their level in the third quarter of 2020.

A few other countries have departed from the general dip-and-surge pattern. In Iceland and Russia, for instance, inflation has risen steadily throughout the pandemic, not just in more recent months. In Indonesia, inflation fell early on and has remained at low levels. In Mexico, the inflation rate fell slightly during the 2020 lockdown period but returned quickly, hitting 5.8% in the third quarter of 2021, the highest level since the fourth quarter of 2017. And in Saudi Arabia, the pattern was reversed: The inflation rate surged during the height of the pandemic but fell sharply in the most recent quarter, to just 0.4%.

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Globalization has changed inflation dynamics, but domestic developments still matter

Subscribe to the economic studies bulletin, kadija yilla kadija yilla former senior research assistant - hutchins center on fiscal & monetary policy, the brookings institution.

September 5, 2019

This blog post summarizes the findings of the paper, “Inflation dynamics: Dead, dormant, or determined abroad?” written by Kristin J. Forbes and part of the Fall 2019 edition of the Brookings Papers on Economic Activity. Read summaries of all six papers from the journal here.

In the Fall 2019 Brookings Papers on Economic Activity paper, “Inflation dynamics: Dead, dormant, or determined abroad?” Kristin J. Forbes of the MIT-Sloan School of Management tested whether growing globalization has played a role in inflation puzzles over the last decade. The issue is taking on increased urgency as central banks evaluate their ability to continue loose monetary policies in the presence of extremely tight labor markets. If inflation is largely determined abroad, a central bank could be less concerned about inflation exceeding its target and be more able to pursue a “high-pressure” economy that prioritizes job creation. If inflation is largely determined globally, however, central banks may also have more limited ability to stabilize inflation in the future. In the extreme, global factors that increase inflationary pressures–such as trade wars that cause companies to move away from global supply chains–could put more pressure on inflation than widely expected.

The core of the many models utilized to understand inflation usually focus on domestic developments, including variables for domestic slack, inflationary expectations, lagged inflation and import prices (as a control for all international developments). After the recession, inflation was persistently higher than predicted in these models, while more recently it has been lower. But Forbes highlights four areas of globalization which are not captured in this framework and could help explain these puzzles. Global variables that could also affect inflation are: increased trade flows, greater use of supply chains to optimize production costs, greater role of emerging markets and their impact on commodities, and a reduction in the bargaining power of workers. The author incorporates indicators for these metrics to model core inflation, CPI inflation, producer price inflation (PPI), and wage inflation.

Forbes’s research suggests that a single, common principle component may account for a large portion of the variance in PPI and CPI inflation, but the role of a shared global variable is noticeably smaller for wage and core inflation. This suggests that the dynamics of PPI and CPI inflation are more determined by global developments, but the dynamics of wage and core inflation more by domestic factors.

To better understand what is driving these patterns, Forbes shifts to more formal analysis, using models based on the Phillips Curve and a less structured trend-cycle decomposition. Analyzing a sample of 31 countries from 1995 to 2017, Forbes finds that CPI inflation can be better explained by adding additional controls for global factors (in addition to just import prices).

Furthermore, as shown in figure 2a, these additional controls for global factors have become more significant in inflation dynamics over the last decade, while the relationship between domestic slack and CPI inflation has become weaker when compared with a pre-crisis window of 1995-2007. The biggest difference in the models arises when trying to explain inflation during the global financial crisis, at which time adding global variables reduces the prediction errors from 1.51 percentage points to 0.90. And over the last decade, the model with global variables has smaller errors mainly due to the increased role of global commodity prices (and to a lesser extent global supply chains). Forbes notes that the global variables used together, and not individually, are responsible for the explanatory power of the model.

In contrast to these results of a more important role of global variables for CPI inflation, there is less evidence that global variables have become more important for explaining core inflation or wage inflation. Global variables can still play a role, but they are generally less important, and their role has not increased over the last decade. These measures of price pressures are still largely determined by domestic slack and other local variables, although there also remains a significant portion that cannot be explained.

The full set of results in the paper suggest that simple frameworks for understanding inflation dynamics are not “dead”, and even though inflation has been “dormant” recently, some of the puzzling patterns in CPI inflation can be explained by CPI inflation being more “determined abroad”. This does not mean, however, that there is no longer a role for central banks or domestic developments in inflation dynamics. Even though CPI inflation is increasingly affected by globalization, and most inflation measures move less tightly with domestic slack, domestic variables are still important determinants of inflation dynamics.

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Essay on Inflation: Types, Causes and Effects

Essay on Inflation!

Essay on the Meaning of Inflation:

Inflation and unemployment are the two most talked-about words in the contemporary society. These two are the big problems that plague all the economies. Almost everyone is sure that he knows what inflation exactly is, but it remains a source of great deal of confusion because it is difficult to define it unambiguously.

Inflation is often defined in terms of its supposed causes. Inflation exists when money supply exceeds available goods and services. Or inflation is attributed to budget deficit financing. A deficit budget may be financed by additional money creation. But the situation of monetary expansion or budget deficit may not cause price level to rise. Hence the difficulty of defining ‘inflation’ .

Inflation may be defined as ‘a sustained upward trend in the general level of prices’ and not the price of only one or two goods. G. Ackley defined inflation as ‘a persistent and appreciable rise in the general level or average of prices’ . In other words, inflation is a state of rising price level, but not rise in the price level. It is not high prices but rising prices that constitute inflation.

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It is an increase in the overall price level. A small rise in prices or a sudden rise in prices is not inflation since these may reflect the short term workings of the market. It is to be pointed out here that inflation is a state of disequilibrium when there occurs a sustained rise in price level.

It is inflation if the prices of most goods go up. However, it is difficult to detect whether there is an upward trend in prices and whether this trend is sustained. That is why inflation is difficult to define in an unambiguous sense.

Let’s measure inflation rate. Suppose, in December 2007, the consumer price index was 193.6 and, in December 2008 it was 223.8. Thus the inflation rate during the last one year was 223.8 – 193.6/193.6 × 100 = 15.6%.

As inflation is a state of rising prices, deflation may be defined as a state of falling prices but not fall in prices. Deflation is, thus, the opposite of inflation, i.e., rise in the value or purchasing power of money. Disinflation is a slowing down of the rate of inflation.

Essay on the Types of Inflation :

As the nature of inflation is not uniform in an economy for all the time, it is wise to distinguish between different types of inflation. Such analysis is useful to study the distributional and other effects of inflation as well as to recommend anti-inflationary policies.

Inflation may be caused by a variety of factors. Its intensity or pace may be different at different times. It may also be classified in accordance with the reactions of the government toward inflation.

Thus, one may observe different types of inflation in the contemporary society:

(a) According to Causes:

i. Currency Inflation:

This type of inflation is caused by the printing of currency notes.

ii. Credit Inflation:

Being profit-making institutions, commercial banks sanction more loans and advances to the public than what the economy needs. Such credit expansion leads to a rise in price level.

iii. Deficit-Induced Inflation:

The budget of the government reflects a deficit when expenditure exceeds revenue. To meet this gap, the government may ask the central bank to print additional money. Since pumping of additional money is required to meet the budget deficit, any price rise may be called deficit-induced inflation.

iv. Demand-Pull Inflation:

An increase in aggregate demand over the available output leads to a rise in the price level. Such inflation is called demand-pull inflation (henceforth DPI). But why does aggregate demand rise? Classical economists attribute this rise in aggregate demand to money supply.

If the supply of money in an economy exceeds the available goods and services, DPI appears. It has been described by Coulborn as a situation of “too much money chasing too few goods” .

Note that, in this region, price level begins to rise. Ultimately, the economy reaches full employment situation, i.e., Range 3, where output does not rise but price level is pulled upward. This is demand-pull inflation. The essence of this type of inflation is “too much spending chasing too few goods.”

v. Cost-Push Inflation:

Inflation in an economy may arise from the overall increase in the cost of production. This type of inflation is known as cost-push inflation (henceforth CPI). Cost of production may rise due to increase in the price of raw materials, wages, etc. Often trade unions are blamed for wage rise since wage rate is not market-determined. Higher wage means higher cost of production.

Prices of commodities are thereby increased. A wage-price spiral comes into operation. But, at the same time, firms are to be blamed also for the price rise since they simply raise prices to expand their profit margins. Thus we have two important variants of CPI: wage-push inflation and profit-push inflation. Anyway, CPI stems from the leftward shift of the aggregate supply curve.

The price level thus determined is OP 1 . As aggregate demand curve shifts to AD 2 , price level rises to OP 2 . Thus, an increase in aggregate demand at the full employment stage leads to an increase in price level only, rather than the level of output. However, how much price level will rise following an increase in aggregate demand depends on the slope of the AS curve.

Causes of Demand-Pull Inflation :

DPI originates in the monetary sector. Monetarists’ argument that “only money matters” is based on the assumption that at or near full employment, excessive money supply will increase aggregate demand and will thus cause inflation.

An increase in nominal money supply shifts aggregate demand curve rightward. This enables people to hold excess cash balances. Spending of excess cash balances by them causes price level to rise. Price level will continue to rise until aggregate demand equals aggregate supply.

Keynesians argue that inflation originates in the non-monetary sector or the real sector. Aggregate demand may rise if there is an increase in consumption expenditure following a tax cut. There may be an autonomous increase in business investment or government expenditure. Governmental expenditure is inflationary if the needed money is procured by the government by printing additional money.

In brief, an increase in aggregate demand i.e., increase in (C + I + G + X – M) causes price level to rise. However, aggregate demand may rise following an increase in money supply generated by the printing of additional money (classical argument) which drives prices upward. Thus, money plays a vital role. That is why Milton Friedman believes that inflation is always and everywhere a monetary phenomenon.

There are other reasons that may push aggregate demand and, hence, price level upwards. For instance, growth of population stimulates aggregate demand. Higher export earnings increase the purchasing power of the exporting countries.

Additional purchasing power means additional aggregate demand. Purchasing power and, hence, aggregate demand, may also go up if government repays public debt. Again, there is a tendency on the part of the holders of black money to spend on conspicuous consumption goods. Such tendency fuels inflationary fire. Thus, DPI is caused by a variety of factors.

Cost-Push Inflation Theory :

In addition to aggregate demand, aggregate supply also generates inflationary process. As inflation is caused by a leftward shift of the aggregate supply, we call it CPI. CPI is usually associated with the non-monetary factors. CPI arises due to the increase in cost of production. Cost of production may rise due to a rise in the cost of raw materials or increase in wages.

Such increases in costs are passed on to consumers by firms by raising the prices of the products. Rising wages lead to rising costs. Rising costs lead to rising prices. And rising prices, again, prompt trade unions to demand higher wages. Thus, an inflationary wage-price spiral starts.

This causes aggregate supply curve to shift leftward. This can be demonstrated graphically (Fig. 11.4) where AS 1 is the initial aggregate supply curve. Below the full employment stage this AS curve is positive sloping and at full employment stage it becomes perfectly inelastic. Intersection point (E 1 ) of AD 1 and AS 1 curves determines the price level.

Now, there is a leftward shift of aggregate supply curve to AS 2 . With no change in aggregate demand, this causes price level to rise to OP 2 and output to fall to OY 2 .

With the reduction in output, employment in the economy declines or unemployment rises. Further shift in the AS curve to AS 2 results in higher price level (OP 3 ) and a lower volume of aggregate output (OY 3 ). Thus, CPI may arise even below the full employment (Y f ) stage.

Causes of CPI :

It is the cost factors that pull the prices upward. One of the important causes of price rise is the rise in price of raw materials. For instance, by an administrative order the government may hike the price of petrol or diesel or freight rate. Firms buy these inputs now at a higher price. This leads to an upward pressure on cost of production.

Not only this, CPI is often imported from outside the economy. Increase in the price of petrol by OPEC compels the government to increase the price of petrol and diesel. These two important raw materials are needed by every sector, especially the transport sector. As a result, transport costs go up resulting in higher general price level.

Again, CPI may be induced by wage-push inflation or profit-push inflation. Trade unions demand higher money wages as a compensation against inflationary price rise. If increase in money wages exceeds labour productivity, aggregate supply will shift upward and leftward. Firms often exercise power by pushing up prices independently of consumer demand to expand their profit margins.

Fiscal policy changes, such as an increase in tax rates leads to an upward pressure in cost of production. For instance, an overall increase in excise tax of mass consumption goods is definitely inflationary. That is why government is then accused of causing inflation.

Finally, production setbacks may result in decreases in output. Natural disaster, exhaustion of natural resources, work stoppages, electric power cuts, etc., may cause aggregate output to decline.

In the midst of this output reduction, artificial scarcity of any goods by traders and hoarders just simply ignite the situation.

Inefficiency, corruption, mismanagement of the economy may also be the other reasons. Thus, inflation is caused by the interplay of various factors. A particular factor cannot be held responsible for inflationary price rise.

Essay on the Effects of Inflation :

People’s desires are inconsistent. When they act as buyers they want prices of goods and services to remain stable but as sellers they expect the prices of goods and services should go up. Such a happy outcome may arise for some individuals; “but, when this happens, others will be getting the worst of both worlds.” Since inflation reduces purchasing power it is bad.

The old people are in the habit of recalling the days when the price of say, meat per kilogram cost just 10 rupees. Today it is Rs. 250 per kilogram. This is true for all other commodities. When they enjoyed a better living standard. Imagine today, how worse we are! But meanwhile, wages and salaries of people have risen to a great height, compared to the ‘good old days’. This goes unusually untold.

When price level goes up, there is both a gainer and a loser. To evaluate the consequence of inflation, one must identify the nature of inflation which may be anticipated and unanticipated. If inflation is anticipated, people can adjust with the new situation and costs of inflation to the society will be smaller.

In reality, people cannot predict accurately future events or people often make mistakes in predicting the course of inflation. In other words, inflation may be unanticipated when people fail to adjust completely. This creates various problems.

One can study the effects of unanticipated inflation under two broad headings:

(i) Effect on distribution of income and wealth

(ii) Effect on economic growth.

(a) Effects of Inflation on Income and Wealth Distribution :

During inflation, usually people experience rise in incomes. But some people gain during inflation at the expense of others. Some individuals gain because their money incomes rise more rapidly than the prices and some lose because prices rise more rapidly than their incomes during inflation. Thus, it redistributes income and wealth.

Though no conclusive evidence can be cited, it can be asserted that following categories of people are affected by inflation differently:

i. Creditors and Debtors:

Borrowers gain and lenders lose during inflation because debts are fixed in rupee terms. When debts are repaid their real value declines by the price level increase and, hence, creditors lose. An individual may be interested in buying a house by taking a loan of Rs. 7 lakh from an institution for 7 years.

The borrower now welcomes inflation since he will have to pay less in real terms than when it was borrowed. Lender, in the process, loses since the rate of interest payable remains unaltered as per agreement. Because of inflation, the borrower is given ‘dear’ rupees, but pays back ‘cheap’ rupees.

However, if in an inflation-ridden economy creditors chronically loose, it is wise not to advance loans or to shut down business. Never does it happen. Rather, the loan- giving institution makes adequate safeguard against the erosion of real value.

ii. Bond and Debenture-Holders:

In an economy, there are some people who live on interest income—they suffer most.

Bondholders earn fixed interest income:

These people suffer a reduction in real income when prices rise. In other words, the value of one’s savings decline if the interest rate falls short of inflation rate. Similarly, beneficiaries from life insurance programmes are also hit badly by inflation since real value of savings deteriorate.

iii. Investors:

People who put their money in shares during inflation are expected to gain since the possibility of earning business profit brightens. Higher profit induces owners of firms to distribute profit among investors or shareholders.

iv. Salaried People and Wage-Earners:

Anyone earning a fixed income is damaged by inflation. Sometimes, unionized worker succeeds in raising wage rates of white-collar workers as a compensation against price rise. But wage rate changes with a long time lag. In other words, wage rate increases always lag behind price increases.

Naturally, inflation results in a reduction in real purchasing power of fixed income earners. On the other hand, people earning flexible incomes may gain during inflation. The nominal incomes of such people outstrip the general price rise. As a result, real incomes of this income group increase.

v. Profit-Earners, Speculators and Black Marketeers:

It is argued that profit-earners gain from inflation. Profit tends to rise during inflation. Seeing inflation, businessmen raise the prices of their products. This results in a bigger profit. Profit margin, however, may not be high when the rate of inflation climbs to a high level.

However, speculators dealing in business in essential commodities usually stand to gain by inflation. Black marketeers are also benefited by inflation.

Thus, there occurs a redistribution of income and wealth. It is said that rich becomes richer and poor becomes poorer during inflation. However, no such hard and fast generalizations can be made. It is clear that someone wins and someone loses from inflation.

These effects of inflation may persist if inflation is unanticipated. However, the redistributive burdens of inflation on income and wealth are most likely to be minimal if inflation is anticipated by the people.

With anticipated inflation, people can build up their strategies to cope with inflation. If the annual rate of inflation in an economy is anticipated correctly people will try to protect them against losses resulting from inflation.

Workers will demand 10 p.c. wage increase if inflation is expected to rise by 10 p.c. Similarly, a percentage of inflation premium will be demanded by creditors from debtors. Business firms will also fix prices of their products in accordance with the anticipated price rise. Now if the entire society “learns to live with inflation” , the redistributive effect of inflation will be minimal.

However, it is difficult to anticipate properly every episode of inflation. Further, even if it is anticipated it cannot be perfect. In addition, adjustment with the new expected inflationary conditions may not be possible for all categories of people. Thus, adverse redistributive effects are likely to occur.

Finally, anticipated inflation may also be costly to the society. If people’s expectation regarding future price rise become stronger they will hold less liquid money. Mere holding of cash balances during inflation is unwise since its real value declines. That is why people use their money balances in buying real estate, gold, jewellery, etc.

Such investment is referred to as unproductive investment. Thus, during inflation of anticipated variety, there occurs a diversion of resources from priority to non-priority or unproductive sectors.

b. Effect on Production and Economic Growth :

Inflation may or may not result in higher output. Below the full employment stage, inflation has a favourable effect on production. In general, profit is a rising function of the price level. An inflationary situation gives an incentive to businessmen to raise prices of their products so as to earn higher doses of profit.

Rising price and rising profit encourage firms to make larger investments. As a result, the multiplier effect of investment will come into operation resulting in higher national output. However, such a favourable effect of inflation will be temporary if wages and production costs rise very rapidly.

Further, inflationary situation may be associated with the fall in output, particularly if inflation is of the cost-push variety. Thus, there is no strict relationship between prices and output. An increase in aggregate demand will increase both prices and output, but a supply shock will raise prices and lower output.

Inflation may also lower down further production levels. It is commonly assumed that if inflationary tendencies nurtured by experienced inflation persist in future, people will now save less and consume more. Rising saving propensities will result in lower further outputs.

One may also argue that inflation creates an air of uncertainty in the minds of business community, particularly when the rate of inflation fluctuates. In the midst of rising inflationary trend, firms cannot accurately estimate their costs and revenues. Under the circumstance, business firms may be deterred in investing. This will adversely affect the growth performance of the economy.

However, slight dose of inflation is necessary for economic growth. Mild inflation has an encouraging effect on national output. But it is difficult to make the price rise of a creeping variety. High rate of inflation acts as a disincentive to long run economic growth. The way the hyperinflation affects economic growth is summed up here.

We know that hyperinflation discourages savings. A fall in savings means a lower rate of capital formation. A low rate of capital formation hinders economic growth. Further, during excessive price rise, there occurs an increase in unproductive investment in real estate, gold, jewellery, etc.

Above all, speculative businesses flourish during inflation resulting in artificial scarcities and, hence, further rise in prices. Again, following hyperinflation, export earnings decline resulting in a wide imbalance in the balance of payments account.

Often, galloping inflation results in a ‘flight’ of capital to foreign countries since people lose confidence and faith over the monetary arrangements of the country, thereby resulting in a scarcity of resources. Finally, real value of tax revenue also declines under the impact of hyperinflation. Government then experiences a shortfall in investible resources.

Thus, economists and policy makers are unanimous regarding the dangers of high price rise. But the consequence of hyperinflation is disastrous. In the past, some of the world economies (e.g., Germany after the First World War (1914-1918), Latin American countries in the 1980s) had been greatly ravaged by hyperinflation.

The German Inflation of 1920s was also Catastrophic:

During 1922, the German price level went up 5,470 per cent, in 1923, the situation worsened; the German price level rose 1,300,000,000 times. By October of 1923, the postage of the lightest letter sent from Germany to the United States was 200,000 marks.

Butter cost 1.5 million marks per pound, meat 2 million marks, a loaf of bread 200,000 marks, and an egg 60,000 marks Prices increased so rapidly that waiters changed the prices on the menu several times during the course of a lunch!! Sometimes, customers had to pay double the price listed on the menu when they observed it first!!!

During October 2008, Zimbabwe, under the President-ship of Robert G. Mugabe, experienced 231,000,000 p.c. (2.31 million p.c.) as against 1.2 million p.c. price rise in September 2008—a record after 1923. It is an unbelievable rate. In May 2008, the cost of price of a toilet paper itself and not the costs of the roll of the toilet paper came to 417 Zimbabwean dollars.

Anyway, people are harassed ultimately by the high rate of inflation. That is why it is said that ‘inflation is our public enemy number one’. Rising inflation rate is a sign of failure on the part of the government.

Related Articles:

• Essay on the Causes of Inflation (473 Words)
• Cost-Push Inflation and Demand-Pull or Mixed Inflation
• Demand Pull Inflation and Cost Push Inflation | Money
• Essay on Inflation: Meaning, Measurement and Causes

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• Inflation ›

Inflation Becomes the Leading Global Concern in 2022

It appears that corona has somehow become a concern of the past, at least for the time being. This perhaps speaks more to the rapid change of new, mounting crises rather than anything else, as the past months have seen droughts, famine, the war in Ukraine, an ensuing energy crisis and skyrocketing inflation.

This chart visualizes just how much can change in the space of two years. According to a survey of nearly 20,000 adults conducted by Ipsos, as many as 50 percent of respondents considered the pandemic a chief concern in January 2021. It has now fallen to a primary worry of only 12 percent - the joint lowest level since the coronavirus pandemic was added to the monthly survey. Inflation follows an opposite trend, however, with only 8 percent of adults stating it was a main concern in September 2020, rising to 40 percent saying it was a worry last month. The countries where most people consider it a major concern for are Poland (67 percent), Argentina (65 percent), Turkey (56 percent) and the UK (56 percent).

The latest data shows that poverty and social inequality come second on the list of concerns as of September 2022, with around one in three respondents around the world selecting it. Hungary (46 percent), the Netherlands (46 percent), Brazil (42 percent), Indonesia (40 percent) and Thailand (40 percent) recorded the highest share of people citing it as a top concern.

When asked whether respondents’ countries were headed in the right direction or not, two thirds of adults said that their country was on the wrong track. Where Saudi Arabians (95 percent) and Indonesians (81 percent) gave the most positive answers, Peruvians (10 percent) and Argentinians (10 percent) were the least optimistic. Meanwhile, the UK and France saw the biggest drops (-9 p.p.).

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Why beating inflation is turning out to be as hard as losing weight

A customer shops at a grocery store in Chicago on Feb. 13, 2024. Annual inflation has eased significantly since two years ago but it has remained stubbornly above 3% this year. Scott Olson/Getty Images hide caption

A customer shops at a grocery store in Chicago on Feb. 13, 2024. Annual inflation has eased significantly since two years ago but it has remained stubbornly above 3% this year.

Beating inflation is starting to feel a lot like losing weight, at least before the Ozempic era: Losing the first pounds is generally easier — it's getting rid of the last ones that's proving hard.

Data released on Wednesday showed consumer prices moving in the wrong direction once again, rising 3.5% in March from a year earlier, a little hotter than the 3.4% rise economists had predicted.

Federal Reserve holds interest rates steady, projects three rate cuts later this year

That also marked a slight pick-up from the 3.2% annual gain seen in February.

And inflation in March also turned out to be hotter than expected when measured on a monthly basis.

Inflation at these levels is still significantly better than it was two years ago, when it peaked at a decades-high of 9.1%.

But inflation is proving to be very stubborn. Although the Federal Reserve has managed to get inflation down significantly from two years ago, it's finding it exceedingly hard to push it below that 3% level.

That matters. That's because a rise of consumer prices above 3%, as it has been through this year, still feels high for many people across the country.

Why the last stretch in the inflation fight is so hard

What makes the current state of inflation particularly problematic is that it's hitting people in ways they can't avoid.

Among the drivers of inflation in March were rents, car insurance and electricity, for example.

"I mean, it's nice to see new and used car prices coming down a little bit, but they're still very high. And people don't go buy a car every month," says Greg McBride, Chief Market Analyst for Bankrate.

"But they do pay the electric bill every month. They do pay the rent every month. And they do have to pay the insurance on the automobile every month."

Gas prices in large parts of the country are rising on the back of higher oil prices. That threatens to push up inflation higher. Scott Olson/Getty Images hide caption

Gas prices in large parts of the country are rising on the back of higher oil prices. That threatens to push up inflation higher.

And lately, another factor is threatening to push up inflation: gas prices. That's because oil prices have been rallying recently because of a number of factors including worsening geopolitics in the Middle East and improved global demand.

The Fed will likely stay cautious

For the Fed it poses a dilemma: Policymakers have made clear they want to see inflation moving more consistently towards its 2% target before it starts cutting interest rates.

It's hard to say when that will happen. Though there are promising signs, they are not conclusive yet.

Fed Chair Jerome Powell this month acknowledged that inflation appeared to be on a "sometimes bumpy path," and was resolute in holding firm on interest rates for now.

"We do not expect that it will be appropriate to lower our policy rate until we have greater confidence that inflation is moving sustainably down toward 2%," Fed Chair Jerome Powell said in a speech this month at Stanford University.

For now, investors are reassessing when the Fed might be ready to cut rates.

Stock and bond markets tumbled on Wednesday after the inflation data came out.

Here's a big reason why people may be gloomy about the economy: the cost of money

Earlier this year, markets had been hopeful the Fed would deliver more than the projected three rate cuts and could even be ready to move quickly.

But the stubbornness of inflation has investors reassessing their calls for interest rate cuts.

Investors are now bracing for fewer than three rate cuts and are eyeing the first potential rate cut in July at the earliest — though expectations can shift.

Ultimately, however, like losing weight, much will depend on whether the Fed can finally shed the last "pounds" of inflation and get it to its goal of 2%.

And it likely won't be easy.

• Fed Chairman Jerome Powell
• consumer prices
• Federal Reserve
• interest rates

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Recent inflation developments and wage pressures in the euro area and the United States

Prepared by Anna Beschin, Katalin Bodnár, Ramon Gomez-Salvador, Eduardo Gonçalves, Marcel Tirpák and Marco Weißler

Published as part of the  ECB Economic Bulletin, Issue 3/2024 .

Headline and core inflation levels and momentum dynamics in the euro area are currently somewhat weaker than in the United States. Headline inflation has fallen faster and from a higher peak in the euro area than in the United States in annual percentage terms − from 10.6% in October 2022 to 2.6% in February 2024 in the euro area and from 9.1% in June 2022 to 3.2% in February 2024 in the United States. [ 1 ] Momentum (measured as annualised three-month-on-three-month growth) is also weaker in the euro area, for both headline inflation and core inflation (Chart A). In both economic blocs, falling energy prices and moderating food inflation have been significant drivers of the decline in headline inflation, while core inflation remains elevated in both economies. [ 2 ]

Headline and core inflation and their momentum in the euro area and the United States

(annual percentage changes, three-month-on-three-month annualised percentage changes)

Sources: Eurostat and Bureau of Labor Statistics. Notes: HICP inflation is reported for the euro area and CPI inflation is reported for the United States. The dotted lines show the momentum. The latest observations are for February 2024.

Services inflation is keeping core inflation elevated in both economic areas. Core inflation in the United States peaked at 6.6% in September 2022 before declining to 3.8% in February 2024. In the euro area, it peaked later, at 5.7% in March 2023, and fell to 3.1% in February 2024. In both economies, core inflation remains persistent, with services inflation acting as the main driver. Over recent years, services inflation has been stronger in the United States than in the euro area (Chart B, panel a). The persistence in the United States is mainly linked to stubbornly high (albeit declining) rent inflation, which is responding only slowly to the significant slowdown of rent inflation in new contracts. Rent inflation accounts for more than half of core services inflation in the United States, making it an important driver of core inflation dynamics. Core services inflation excluding rents currently stands at 4.4%. This is above its pre-pandemic average of around 2% and strongly driven by inflation in the transport and recreation sectors. In the euro area, increases in rents have been more moderate and rent inflation contributes significantly less to services inflation. [ 3 ] Services inflation stands at 4.0% (the same when excluding rents), also well above the pre-pandemic average of 1.9%. Tourism and recreation-related (more contact-intensive) services inflation, at 4.5%, is also higher than total services inflation in the euro area, notwithstanding strong declines over the course of 2023.

By contrast, goods inflation has decreased considerably in both economies, with the fall commencing significantly earlier in the United States. Goods inflation has slowed down markedly in both economies in line with the supply chain normalisation at the global level, lower commodity prices and monetary policy tightening (Chart B, panel b). This trend has been reinforced by the shift in consumer spending from goods to services since the start of the post-pandemic reopening. In the United States, the contribution of goods inflation to overall inflation is already slightly negative, in line with pre-pandemic trends. In the euro area, goods inflation is still somewhat higher than its long-term average and than in the United States. This is likely due to a lagged impact of the energy shock following the Russian invasion of Ukraine, which hit the euro area harder, together with differences in the timing of monetary policy tightening. [ 4 ]

Services and goods inflation and their momentum in the euro area and the United States

Sources: Eurostat and Bureau of Labor Statistics. Notes: HICP inflation is reported for the euro area and CPI inflation for the United States. For the euro area, goods inflation refers to non-energy industrial goods. The dotted lines show the momentum. The latest observations are for February 2024.

Measures of underlying inflation have been broadly declining from their respective peaks in both the euro area and the United States (Chart C). These measures, which aim to capture the more persistent component of inflation and relate to the HICP in the euro area and to the personal consumption expenditure (PCE) index in the United States, rose considerably after the coronavirus (COVID-19) pandemic, but began to generally decline in 2023. [ 5 ] The range of indicators started crossing the 2% threshold in the last few months. In both economies, the Persistent and Common Component of Inflation (PCCI) measures are at the bottom of the respective ranges. In part, this reflects the fact that the PCCI extracts signals in a more timely manner from monthly price dynamics across many items. [ 6 ] In the euro area, the domestic inflation indicator, which includes HICP items with a low import intensity, is currently the highest and most persistent measure, demonstrating the importance of price pressures in the domestic economy, such as wage and profit developments. [ 7 ] In the United States, the cyclical core inflation indicator, which tracks price developments in categories sensitive to the unemployment gap, stands at the top of the range after reaching much higher levels than the other underlying inflation measures, likely reflecting still relatively tight labour market conditions in the United States. The Supercore indicator for the euro area, which follows a comparable approach to the US cyclical core inflation indicator, showed similar developments over the last 12 months, but now stands at a lower level, consistent with the weaker demand in the euro area than in the United States. [ 8 ]

Measures of underlying inflation in the euro area and the United States

(annual percentage changes)

Sources: Eurostat, Haver Analytics, Bureau of Economic Analysis, Federal Reserve Bank of San Francisco, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Dallas, Federal Reserve Bank of New York and ECB staff calculations. Notes: For the euro area measures, see the box entitled “ Underlying inflation measures: an analytical guide for the euro area ”, Economic Bulletin, Issue 5, ECB, 2023. The PCCI and the PCCI excluding energy measures for the United States PCE index are estimated using the methodology in Bańbura, M. and Bobeica, E., op. cit. The latest observations are for February 2024. HICPX stands for HICP inflation excluding energy and food.

The euro area and the United States are at different points in the economic cycle, which is contributing to differences in inflation. In the euro area, real GDP remained largely flat over 2023 and the output gap was estimated to be around zero. [ 9 ] By contrast, the US economy grew strongly over the same period, particularly in the second half of the year, and the output gap is estimated by most international organisations to have remained in positive territory. Moreover, growth in the United States is supported by buoyant consumption in particular, further contributing to consumer inflation. This contrasts with the anaemic growth in consumption recorded in the euro area. Notwithstanding the differences in the cyclical developments, monetary policy has been effective in cooling inflationary pressures in both economies. [ 10 ]

The different cyclical positions of the two economies, as well as institutional factors, are also reflected in the growth of unit labour costs. Unit labour cost growth remains elevated in the euro area, while in the United States it has been moderating since the end of 2022. The difference is being driven by both wages and productivity. Higher unit labour cost growth in the euro area during 2023 reflects both stronger wage growth and weaker productivity developments (Chart D, panel a). By contrast, unit labour cost growth in the United States already started to decrease in 2023 (Chart D, panel b), due to both wage growth moderation and strong productivity dynamics. In addition to cyclical developments, such differences are also attributable to institutional differences in labour markets between the euro area and the United States.

Unit labour cost growth and its decomposition in the euro area and the United States

Sources: Eurostat, Bureau of Economic Analysis and Bureau of Labor Statistics. Notes: Productivity growth reduces unit labour cost growth, so it appears in the decomposition with an inverted sign. Euro area unit labour cost growth in 2021 was affected by compensation per employee and productivity developments in 2020, reflecting the impact of job retention schemes. The latest observations are for the fourth quarter of 2023.

In the euro area, the pace of wage growth seems to have reached its peak around mid-2023, while in the United States it has been subsiding from high levels since the end of 2022. Wage growth in the euro area picked up from rather subdued levels in early 2021, with employees aiming to recoup purchasing power lost to high inflation amid tight labour markets. It started to ease during 2023, albeit remaining well above past averages. Labour market tightness began to diminish in the United States at the end of 2022, as reflected in a decline in the ratio of vacancies to unemployment, and wage growth subsequently started to subside from high levels. Despite its slow yet steady decline, US wage growth remains above the levels the Federal Reserve System considers compatible with its inflation target. [ 11 ] The later peak of wage pressures in the euro area compared with the United States is explained by both cyclical and structural factors. Specifically, a more flexible US labour market makes wage growth more sensitive to changes in labour market tightness. [ 12 ] In addition, collective bargaining coverage is higher in the euro area, but so is wage coordination. Wage negotiations mainly take place at the sector level, resulting in a more staggered response of wages to the impact of shocks. By contrast, the predominant firm-level model of wage bargaining in the United States may lead to wages responding faster to prevailing labour market conditions.

In the second half of 2023, labour productivity grew below its pre-pandemic trend in the euro area, while accelerating in the United States. These differences partly reflect both structural and cyclical factors. In terms of structural differences, labour productivity was already growing at a slower rate in the euro area than in the United States before the pandemic. Over the period from 2016 to 2019, the average year-on-year growth rate of productivity was around 0.6% in the euro area and around 1.1% in the United States. The structural differences relate among other factors to the lack of firms at the global technology frontier and the slower diffusion of new technologies, which have led to slower growth of capital stock and total factor productivity in the euro area. [ 13 ] On the cyclical side, productivity growth has declined in the euro area − a cyclical behaviour common to the more rigid euro area labour markets where firms tend to hoard labour during times of low or negative GDP growth. [ 14 ] By contrast, the above-average labour productivity growth in the United States in the second half of 2023 was driven by exceptionally strong GDP growth. This followed negative productivity growth in 2022 due to the strong recovery in services employment after the post-pandemic reopening of the economy. In the euro area, the projected uptick in GDP growth and a recovery in productivity to levels closer to pre-pandemic trends should support lower unit labour cost growth in the future.

See also the box entitled “ Inflation developments in the euro area and the United States ”, Economic Bulletin , Issue 8, ECB, 2022.

There are some differences between the euro area and the United States in the classification of certain categories in the inflation statistics. In particular, food services are part of services prices in the euro area and part of food prices in the United States. At the same time, alcoholic beverages and tobacco are included in food prices in the euro area and in goods prices in the United States.

In 2023 the average weight of rents in services core inflation was 57% in the United States – with the rent of primary residence representing 13% while the owners’ equivalent rent reached 44% − and 13% in the euro area. Owners’ equivalent rent is not included in euro area HICP.

The relative weights of goods and services inflation differ in the euro area and the United States, which also contributes to the differences in core inflation. Services make up about 40% of HICP inflation in the euro area and about 60% of CPI in the United States

For the euro area, see the box entitled “ Underlying inflation measures: an analytical guide for the euro area ”, Economic Bulletin , Issue 5, ECB, 2023. For the United States, underlying inflation measures are based on PCE inflation, the Fed’s preferred measure, rather than CPI inflation.

See Bańbura, M. and Bobeica, M., “ PCCI – a data-rich measure of underlying inflation in the euro area ”, Statistics Paper Series , No 38, ECB, 2020.

See the box entitled “ A new indicator of domestic inflation for the euro area ”, Economic Bulletin , Issue 4, ECB, 2022.

The Supercore indicator includes only those items of HICP inflation excluding energy and food (HICPX) that are deemed sensitive to slack, as measured by the output gap. See the article entitled “ Measures of underlying inflation for the euro area ”, Economic Bulletin , Issue 4, ECB, 2018.

See European Commission European Economic Forecast, Autumn 2023 . Source: AMECO database.

In the euro area, model-based evidence confirms a dampening impact of the monetary policy tightening on HICP inflation. See the box entitled “ A model-based assessment of the macroeconomic impact of the ECB’s monetary policy tightening since December 2021 ”, Economic Bulletin , Issue 3, ECB, 2023. For an analysis of the macroeconomic impact of the Federal Reserve’s latest tightening cycle, see D’Amico, S. and King, T., “ Past and Future Effects of the Recent Monetary Policy Tightening ”, Chicago Fed Letter , No 483, Federal Reserve Bank of Chicago, September 2023, and Crump, R., Del Negro, M., Dogra, K., Gundam, P., Lee, D., Nallamotu, R. and Pacula, B., “ A Bayesian VAR Model Perspective on the Lagged Effect of Monetary Policy ”, Liberty Street Economics , Federal Reserve Bank of New York, 21 November 2023.

See, for example, the opening remarks by Chair Powell at Spelman College on 1 December 2023.

See the box entitled “ Labour market developments in the euro area and the United States in 2022 ”, Annual Report , ECB, 2022, and the box entitled “Comparing labour market developments in the euro area and the United States and their impact on wages” in “ Wage developments and their determinants since the start of the pandemic ”, Economic Bulletin , Issue 8, ECB, 2022.

See, for instance, the box entitled “ Firm productivity dynamism in the euro area ”, Economic Bulletin , Issue 1, ECB, 2022.

See also Arce, O., Consolo, A., Dias da Silva, A. and Mohr, M., “ More jobs but fewer working hours ”, The ECB Blog, 7 June 2023.

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Inflation: 6 Times Americans Felt the Pinch

By: Dave Roos

Published: April 22, 2024

The U.S. Bureau of Labor Statistics has tracked inflation since 1913, charting the rise and fall of the Consumer Price Index, which measures what Americans are paying for food, clothing, housing, energy, transportation and more. Over more than a century, inflation has reared its ugly head during times of postwar prosperity, crippling recession, oil crises and global pandemics.

Here are six periods when inflation reached historic heights in the United States.

1. World War I Inflation Was the Worst

America’s worst inflation on record occurred during and after World War I , when the price of just about everything—food, clothing, household goods—more than doubled. The largest single-year price increase during the post-World War I era was 23.7 percent from June 1919 to June 1920. But taken as a whole, prices surged more than 80 percent from late 1916 to mid-1920.

As with most inflationary episodes, the baseline cause of the World War I-era inflation boom was a shift in supply and demand.

“Wars, especially large-scale wars like World War I and World War II, demand a lot of resources,” says Steve Reed, an economist with the Bureau of Labor Statistics. “Resources are being taken out of the non-military sector of the economy and diverted to military use, and that can create some shortages and scarcities, which leads to people bidding up the prices of remaining items.”

In 1920, regional Federal Reserve banks tried to combat runaway inflation by raising their discount interest rates sharply. This was before the Federal Reserve had a unified national monetary policy. High interest rates and a cooling economy sunk the U.S. into a deep, but thankfully brief recession from 1920 to 1922.

Reed says that the post-World War I period was one of the most volatile in American history in terms of consumer prices. After skyrocketing more than 23 percent in 1920, prices fell more than 15 percent in 1921.

2. World War II Rationing Led to Postwar Demand

Before World War II , the greatest economic concern for most Americans wasn’t inflation, but deflation. In the early 1930s, the Great Depression brought record unemployment and economic stagnation. With little money to spend, consumer demand dried up and prices fell. The period from 1931 to 1932 marked the greatest deflation in U.S. history at more than 10 percent.

But the same forces that drove up prices during the World War I era went into overdrive for World War II.

“World War II was a total war,” says Reed. “It diverted an enormous amount of manpower and resources to the war effort. On top of that, there were a lot of wartime restrictions on consumer behavior. Lots and lots of goods were rationed ; not just luxury goods, but basic staple items.”

During World War II, there were shortages of everything: coffee, milk, meat, sugar, canned goods, tires, gasoline and more. Since low supply can drive inflation, the Roosevelt administration instituted price controls and rationing of in-demand goods. Those tactics worked to suppress inflation during the active war years, but it laid the conditions for an explosive postwar inflation rebound.

When rationing and price controls were dropped after World War II, it released a tsunami of pent-up consumer demand. Soldiers came home and American families that had dutifully been buying war bonds for years were eager to spend their savings.

“There was this surge of people wanting to buy stuff, but it takes the economy a little bit of time to transition from military goods back to domestic goods,” says Reed. “Before the supply can match this pent-up demand, there was a really strong inflationary period from the latter part of 1946 to 1947.”

The postwar mismatch of supply and demand drove inflation to increase 20.1 percent from March 1946 to March 1947 alone. But even higher prices didn’t slow consumers down. From 1945 to 1949, American households purchased 20 million refrigerators, 21.4 million cars and 5.5 million stoves.

3. The Korean War Triggers Inflation Anxieties

By the end of the 1940s, the wildest years of the post-World War II economic boom were over and the economy even slipped into recession. But that didn’t last long. The U.S. went to war with Korea in June 1950 and inflation was back in the news.

With fresh memories of World War II shortages and rationing, consumers scrambled to buy household goods, cars and non-perishable food. That drove overall inflation to a high of 6.8 percent from 1950 to 1951 with food prices alone jumping 10 percent.

Under the newly created Office of Price Stabilization, the federal government reinstituted price controls and rationing until the war’s end in 1953. Since shortages and rationing during the Korean War weren’t as severe as World War II, there wasn’t as much pent-up demand and runaway inflation after the Korean conflict.

In fact, the mid-1950s to late 1960s marked one of the calmest inflationary periods on record, when strong consumer demand was matched by a booming economy. Year-over-year inflation in that period ranged between 1 and 3 percent.

But as prosperous as the 1950s and 1960s were, Reed says that nostalgia for America’s economic “golden age” distorts the true picture of how volatile prices were throughout most of the 20th century.

“The '50s are looked upon fondly as a period of prosperity and relative price stability, and I think some people think that was the norm, that it’s the way it always was,” says Reed. “But it was really just a brief period. Almost the entire rest of our history is more bumpy and problematic in terms of economic performance.”

4. The 1970s: Stagflation

While wars were the main driver of inflation in the first half of the 20th century, it was oil prices that dominated the second half.

In the 1970s, the U.S. economy was shaken by two “oil shocks.” The first was in 1973 and 1974, when the Organization of Arab Petroleum Exporting Countries (OAPEC) declared an oil embargo against the U.S. and the Netherlands over their support of Israel during the fourth Arab-Israeli war. A second oil shock occurred in 1979 when oil production was disrupted by the Iranian Revolution and the Iran-Iraq War .

When oil prices surge, so do the prices of gasoline, heat, electricity and even food. Overall inflation shot up 10.5 percent during the first “oil shock” (December 1972 - December 1974) with the price of energy increasing 19.3 percent and the price of food up 16.1 percent.

Things were even worse during the second oil shock with overall inflation reaching a peak of 14.8 percent between March 1979 and March 1980, the highest on record since World War II. Not only was inflation painfully high, but the economy of the late 1970s was also in a recession. This dismal double-whammy was dubbed “stagflation.”

“High inflation is usually associated with economies that are too ‘hot’—prices go up because the economy is booming and wages are going up,” says Reed. “That was certainly not the case from 1979 to 1981. Stagflation really was a ‘worst of both worlds’ scenario—high inflation, high unemployment and slow growth.”

5. Oil and Gas Spikes in 1989 and 2008

The year 1983 marked the end of the painful stagflation era and the beginning of decades of steady and mostly stable inflation. The two exceptions were in 1989 and 2008, when spiking oil and gas prices triggered brief bouts of higher inflation.

Iraq invaded its oil-producing neighbor Kuwait in August of 1990, but growing tensions between the countries—and Iraqi leader Saddam Hussein’s erratic behavior—drove up oil prices months earlier. Crude oil went from a low of $16.04 a barrel in 1989 to a high of $32.88 a barrel in 1990, more than double the price.

The surging cost of oil and gasoline pushed the overall inflation rate in the U.S. to a high of 6.3 percent over the 12 months between October 1989 and October 1990. After the Gulf War, energy prices settled back down and inflation subsided.

The next brief inflationary episode came in 2008, right in the middle of the Great Recession . The collapse of the housing market and the near-failure of several major U.S. banks led to huge stock market losses and rising unemployment rates. Just when things couldn’t get worse, oil prices jumped from a low of $35.59 a barrel to a high of $127.77 a barrel in 2008.

The price spike was caused by record high demand from China, the Middle East and Latin America combined with overall uncertainty about the global oil supply. At the gasoline pump, Americans went from paying less than $2 a gallon to a high of $4.14 a gallon in July 2008. Overall inflation climbed over 5 percent for the first time since 1991, but quickly receded in 2009 when the struggling U.S. economy briefly dipped into deflation for the first time since 1955.

6. Pandemic Inflation Worst in 40 Years

The COVID-19 pandemic upended the global economy in ways the world hadn’t seen since World War II. Hundreds of millions of people worldwide were forced to stay home from work, global supply chains ground to a halt and there were widespread shortages of consumer goods.

Similar to World War II, when pandemic restrictions finally loosened in the U.S., there was pent-up consumer demand chasing a relatively low supply—the perfect recipe for inflation.

The 12-month inflation rate peaked from June 2021 to June 2022 at 9.1 percent for all goods. Food prices experienced some of the highest price increases, jumping 11.4 percent at the grocery story over that same period. For many Americans, these dramatic price increases came as a shock, considering that year-over-year inflation had averaged just 2.3 percent from 1991 to 2019.

“The pandemic came after nearly four decades of relatively modest price changes,” says Reed. “It was the highest inflation since the early 1980s, but you put it in a broader contest, the pandemic inflation doesn't rank so highly. It wasn’t nearly as severe as the early 1980s, the oil shocks of the 1970s or post-World War II.”

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Why Better Times (and Big Raises) Haven’t Cured the Inflation Hangover

Frustrated by higher prices, many Pennsylvanians with fresh pay raises and solid finances report a sense of insecurity lingering from the pandemic.

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By Talmon Joseph Smith

Reporting from the central, eastern and southwestern counties of Pennsylvania

In western Pennsylvania, halfway through one of those classic hazy March days when the worst of winter has passed, but the bare trees tilting in the wind tell everyone spring is yet to come, Darren Mattern was putting in some extra work.

Tucked at a corner table inside a Barnes & Noble cafe in Logan Town Centre, a sprawling exurban shopping complex in Blair County, he tapped away at two laptops. His work PC was open with notes on his clients: local seniors in need of at-home health care and living assistance, whom he serves as a registered nurse. On his sleeker, personal laptop he eyed some coursework for the master’s degree in nursing he’s finishing so he can work as a supervisor soon.

Mr. Mattern, warm and steady in demeanor, says the “huge blessing” of things evident in his everyday life at 35 — financial security, a home purchase last year, a baby on the way — weren’t possible until recently.

He had warehouse jobs for most of his 20s, making a few dollars above minimum wage (in a state where that’s still $7.25 an hour), until he took nursing classes in the late 2010s. Shortly after becoming certified, he pushed through long days in a hospital during the height of the Covid pandemic at a salary of $40,000. Today, he has what he calls “the best nursing job pay-wise I’ve ever had,” at $85,000.

Mr. Mattern’s trajectory is one bright line in a broad upward trend that hundreds of thousands of Pennsylvanians, and millions of other Americans, have experienced since the pandemic recession — a comeback in which unemployment has been below 4 percent for the longest stretch since the 1960s, small-business creation has flourished and the stock market has reached new heights.

There’s a disconnect, however, between the raw data and a national mood that is somewhat improved but still sour. A surge in average weekly pay and full-time employment has helped offset the demoralizing effects of a two-year bout of heavy inflation as the global economy chaotically reopened. But it has not neutralized them.

Mr. Mattern — mentioning families of patients he knows who are just getting by, and his annoyance with the rising price of produce since 2020 — grades the economy as a “six or seven out of 10” — “a C,” he said.

In West Philadelphia, in wealthy suburbs near Pittsburgh and Harrisburg, in Appalachian farmlands, in old industrial towns and in the middle-class townships nestled between, Pennsylvanians seem bitten with nostalgia for 2019: its lower prices, its lower interest rates, its location as the last reference point of normality before a series of volatile years.

In a shift that closely mirrors wage movement in the nation at large, almost one in two Pennsylvania workers made less than $15 an hour in 2020, but in 2023, roughly 73 percent made above that level. From 2020 to 2023, the median hourly wage in the state rose from $16.50 to $19.85, a 20 percent jump.

According to the Bureau of Labor Statistics , $100 in January 2020 has about the same purchasing power as $120 now, a 20 percent cumulative increase. So until last year — when inflation-adjusted wage gains turned positive as inflation slowed — that wrestling match between prices and pay raises had often fought to a draw.

In 2022, Melody Hittle was making $12.50 an hour at a beach hotel in her hometown, Long Neck, Del. Now 23, she moved to State College, Pa., six months ago to be near her partner — living out of her car and spending some nights in his dorm until she found a small place to rent for $900. She has a job with benefits as the late-shift concierge at a local hotel, making $18 an hour, a 44 percent rise in pay from 2022.

But Ms. Hittle winces at groceries costing them $400 a month, and interest rates that make the idea of financing a new car in the coming years feel out of reach. (An M.I.T. calculator that uses state and county level data to assess affordability puts the “living wage” in the State College area for an adult in 2024 at $23.15 an hour.) She has followed online debates about attitudes toward the economy and thinks some don’t reckon enough with “where people are starting from.”

Some may see her gains in relative terms, she said. And they may ”think, ‘Oh well, I only added 12 percent to my portfolio in the last year, so that’s great’ — but you also started with a base of $100,000, or $500,000, or $1 million,” she said. “I don’t have that advantage.”

Nostalgia for 2019

Some 64 percent of Pennsylvanians responding to a Quinnipiac poll in early January described their financial situation as excellent or good; 24 percent characterized it as “not so good,” and only 9 percent called it poor. But in the same survey, only 33 percent of Pennsylvanians described “the state of the nation’s economy” as excellent or good.

Vocal frustration with more expensive gas and food, rent-raising landlords and premium-raising insurance companies still animates small talk among friends. Home prices have soared, a blessing for homeowners but a curse for those seeking to join their ranks. Child care and elder care costs, rising before the pandemic, are still ascending. (And beyond needs like auto insurance, there is annoyance with the $4 bag of chips in the checkout aisle, or a $10 pint of beer that used to be $7.)

The most popular measure of national consumer sentiment , tracked by the University of Michigan since 1978, has reached its highest level since July 2021, before the worst of inflation hit. But sentiment hasn’t fully recovered. It remains suspended halfway between its all-time low in June 2022 — when inflation topped at 9 percent — and its peak in the 21st century, around New Year’s Eve 2019.

“Trying to make yourself happy is difficult,” said Lindsay Danella, an Altoona, Pa., native.

At 39, she recently left a job making over $70,000 as a general manager at a hotel where she said executives dealt with understaffing during and after the pandemic by asking managers like her to do more of everything without offering more flexibility or pay.

Now, as a server at Levity Brewing in downtown Altoona, she makes the legal subminimum wage for tipped workers in the state, about $3, but says she has found ways to “love it” despite that low base. Business is good, so tips are plentiful on weekends. And the taproom, which opened in 2022 in a remodeled space with floor-to-ceiling windows, is part of a district that has been revitalizing since 2021.

After feeling overworked and burned out since 2020, she has been able to step back in her new job and spend more time with her daughter, sharing parental duties with her ex-husband.

It also helps that, like most of the 70 percent of Pennsylvanians who are homeowners, Ms. Danella has been protected against rent inflation thanks to her low-cost, fixed-rate home mortgage payment. But many family members and friends in her network, who consider themselves relatively fortunate as she does, have been feeling somewhat unmoored since the pandemic.

So many, she explained, have had “a midlife crisis” — a spate of people changing jobs, shifting relationships, managing children through “Zoom school,” adjusting to a move or being unable to afford one because of higher interest rates, all while facing a whirl of new expenses.

“It feels like someone put us in a long rinse cycle in a washing machine,” she said, “and forgot to take us out.”

Places Where Some Feel Left Behind

Plenty of indicators in Pennsylvania point to economic health. New-business applications from expected employers were up 38 percent from 2021 to 2023 compared with those from 2017 to 2019. The unemployment rate is 3.4 percent.

But most people “don’t worry about broad state-level or national-level trends,” said Joshua Mask, a labor economist at Temple University in Philadelphia. “Most people’s understanding of the economy is going to be their own little world.”

Mike Brown, a 53-year-old tradesman from Tower City, has mostly witnessed decline within his part of Appalachia in Schuylkill County .

A fully employed machinist at a time when he sees fewer and fewer like him, he assigns blame for the decades-long falloff in solid manufacturing jobs to outside forces: large corporations, foreign labor and domestic leaders who he thinks “went wild with free trade.”

“A lot of people made good money,” he said. “And it just seems like the people were making too good of money, so it was one of them things where they said, ‘Well, if we take this to China, we can then not pay these high-priced machinists to do this work, and we can get the Chinese to do it for real cheap.’ And that pretty much undercut our whole trade.”

Schuylkill County’s aging and shrinking population is in the state’s coal region, where the rise of alternative fuels and of cheap shale natural gas unearthed in nearby counties has cost jobs in traditional mining and extraction . (To the west, the Homer City Generating Station, the largest coal-fired power plant left in the state, was decommissioned in July.)

Mr. Brown decided to commemorate the manufacturing and mineral-driven days of prosperity with the name of the local carwash he owns: Anthracite — “as in Anthracite coal,” he says.

Perched on a hill along West Grand Avenue, the main street in Tower City, Anthracite Carwash sits opposite Mr. Brown’s brick house, which he recently renovated. Adjacent is a charming stretch of churches, rows of white, light pink and blue two-story houses with neat porches, and a cluster of old corner stores still hanging on.

“But people ain’t rich here,” said Mr. Brown, who rates the economy as worse than it was in 2019. “Stuff’s kind of falling down.”

Doing Well, but Feeling for Others

Enjoying a night out in the up-and-coming Pittsburgh neighborhood of East Liberty, Matt Cillo, 25, said everything was just fine for guys like him. He has a good apartment and well-off friends. An engineering major, he now works in quality control for a major corporation that offers solid benefits.

“But I feel bad saying the economy’s good,” he said, “because it’s obviously still hard for a lot of people.”

At the state’s opposite end in Philadelphia, the skyline is grazed with cranes. And there is a steady stream of renovations to the homes and businesses to the west of the University of Pennsylvania and Drexel University.

That redevelopment is frequently viewed by some residents as unwanted gentrification. For a city where one in five people are in poverty, the idea of a longer-term structural improvement competes with the immediate worry of rising rents.

Many longtime homeowners like Donald Woods — a 68-year-old retired firefighter who lives near Malcolm X Memorial Park — are insulated from those concerns. The house he bought in his leafy area of West Philadelphia in 1999 for roughly $76,000 is now worth multiples of that. His stock portfolio is up, and he has a pension earned in his firefighting days.

“I’m good,” he said recently at the corner of 51st Street and Haverford Avenue, a favorite hangout, just west of where West Philly has grown hoity-toity. But like many, he stands in solidarity with those feeling less secure.

He mostly worries about the discouraged young people he sees, with or without degrees, languishing in jobs with pay that he thinks is worth less than what he earned in his youth without a degree.

In one of his best gigs, he remembers working for a local trucking company in his late teens in the mid-1970s, making $10 an hour (what amounts to $66 an hour today, adjusted for inflation). He drives a bus now Monday through Thursday for $20 an hour — not for the money, he says, but because he can’t imagine “sitting around waiting to die.”

Mr. Woods is known as “The Rib Man” in the area, for his brief but legendary run operating a barbecue food truck. Starting in 2018, pausing during the pandemic and ending in 2022, Mr. Woods enjoyed the hobby and the community paid him handsomely for it, with plates often selling out within an hour of opening time.

He argues that operating during the height of inflation taught him that the stories many business owners tell about why they have to raise prices, or limit wage increases, are often conveniently self-interested: “Most of them are true — some of them aren’t,” he said.

Like others, Mr. Woods had to deal with the increase in fuel and meat prices, but he said that he still had plenty left over to pay the person working the window $25 an hour.

He remains unimpressed that many stores and other places have jumped to paying workers around $15 an hour. “What are you supposed to do with that?” he said. “Even rent deep in the hood is pricey.”

Political Overtones as Elections Loom

Many of the cost-of-living issues distressing Pennsylvania families are structural, existing for years before the pandemic. And some research papers have buttressed the notion among some economists that much of inflation was induced by pandemic-driven supply shocks, not government overspending, as others have argued.

None of that may matter for political incumbents looking to defend their records to a frustrated public.

The connection between Biden-era relief programs, resurgent businesses and the speedy return to low unemployment — enabling workers to leave for a better job, or win better pay — seems abstract to many. Sticker shock in a store aisle is straightforward.

The Federal Reserve may still lower interest rates this year, which could improve housing affordability and economic sentiment, as well as President Biden’s re-election prospects. Regardless of rate moves, though, a range of economists expect the national mood to slowly improve as people get used to new prices and achieve more raises outpacing inflation.

For Ms. Danella, the server at Levity Brewing in Altoona, compared with “the last four years,” this early spring has had a different feel about it — “like some cycle is ending,” she said.

“I think we all just got to get our footing a little bit,” she added. “I think luck is turning around for a lot of people, and I think we all deserve that.”

Talmon Joseph Smith is a Times economics reporter, based in New York. More about Talmon Joseph Smith