Inflation During the Pandemic in the OECD

Inflation is definitely here. The latest CPI release puts the annual inflation rate in the US at 8.5% over the past 12 months, the highest 12-month period since May 1981. That’s bad, especially because wages for many workers aren’t keeping up with the price increases (and that’s true in other countries too).

But what about other countries? Many countries are experiencing record inflation too. The same day the US announced the latest CPI data, Germany announced that they also had the highest annual inflation since 1981.

Using data from the OECD, we can make some comparisons across countries during the pandemic. I’ll use data through February 2022, which excludes the most recent (very high!) months for places like the US and Germany, but most countries haven’t released March 2022 data quite yet.

Let’s compare inflation rates and GDP growth (in real terms, also from the OECD), using the end of 2019 as a baseline. We’ll compare the US, the other G-7 countries, and several broad groups of countries (OECD, OECD European countries, and the Euro area). The chart below uses “core inflation,” which excludes food and energy (below I will use total inflation — the basic picture doesn’t change much).

From the scatter plot, we can clearly see that the US has had both the highest inflation and the best economic performance. Prices have increased by almost 9% (it will be 10% once we include March 2022), and GDP has grown by over 3%. And that GDP figure is a volume index, so it doesn’t need to be further adjusted for price inflation.

In fact, among this group of major countries, the US is the only one with over 3% economic growth during the pandemic (there are other small countries with greater than 3% growth, such as Australia, Denmark, South Korea, New Zealand, Norway, Sweden, and Estonia). No other G-7 country has exceeded 1%, and four of them are still negative!

This is just scatter plot. I’m not going to fit a line, since that might imply there is some causation between these two variables (there might be, but I don’t want to imply it with just this data). In an alternate world where the US had less monetary and fiscal stimulus, would we look more like the other G-7 countries? Many have tried to model this. It’s a hard counterfactual (we’ve never experienced a boom-bust cycle like this one). Perhaps it would be true.

Would we be willing to take that trade-off? Switch places with Canada or Germany? I don’t know the answer. But it’s at least worth considering. These are the kinds of trade-offs that macroeconomic policy is always trying to target. Whether they can do so well or not is a hard question.

So, before you complain about the high rates of inflation in the US (and they are indeed high and bad!) at least consider the possibility that lower inflation would mean lower economic growth. Would you take that trade-off?

Finally, here’s the same chart with total inflation instead rather than core inflation. While the inflation rates are generally higher than the first chart (primarily due to energy prices), the pattern is completely unchanged.

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