INFLATION’S RISE AND FALL

 

As inflation began to rise in 2021, most policymakers and analysts predicted that the increase would be neither particularly large nor persistent. But by 2022, inflation had become an acute problem for central bankers. Then, after some of the sharpest and most synchronized monetary policy tightening on record, world inflation ebbed almost as suddenly as it had risen.

We see two broad explanations. The first stresses that inflation rose at the same time in most countries because they were subjected—to varying degrees—to a similar sequence of shocks: the pandemic, mobility restrictions, and associated economic policy measures, especially the extent of fiscal and monetary support. This emphasizes domestic drivers. More fiscal and monetary support, tighter labor markets, or less-well-anchored inflation expectations would translate into higher inflation.

The second stresses that inflation rose everywhere at the same time, not because local shocks were identical across countries, but because global causes were at play. The surge in energy and food prices, intensified by Russia’s invasion of Ukraine, triggered an energy crisis akin to the 1970s oil shocks. Geopolitics was the cause of both series of events. And it’s true that global energy prices and headline inflation rose together even as long-term inflation expectations held steady).