The world is full of inflation
By Scott Sumner
I often see pundits talk about how inflation is dead, how “global forces” are holding down inflation. This is nonsense. Most people live in countries where inflation is 3% or higher, often much higher. Here are just a few examples (estimates of 2021 inflation from The Economist). They contain most of the world’s population:
Sri Lanka 5.1%
Venezuela 640% (world’s highest)
South Africa: 4.1%
Most of these are not particularly small countries. For instance, the combined population of Pakistan and Indonesia is nearly 500 million, roughly equal to North America.
You might wonder if the high inflation is somehow caused by the fact that these are developing countries. But why would an advanced country like the US forget how to do something that a less advanced country such as India can accomplish with ease? Turkey has double-digit inflation, while neighboring Bulgaria has less than 3% inflation. And yet both countries have fairly similar levels of per capita GDP (in PPP terms.) And I’ve excluded from this list many extremely poor countries with almost no inflation.
The actual distinction is monetary policy. Bulgaria’s currency is fixed to the euro, and the ECB targets inflation at below 2%. Not surprisingly, eurozone inflation is below 2%.
People often mention China as a factor holding down inflation, which is nonsense. Growth in Chinese exports reduces the relative prices of imported manufactured goods, but has no bearing on changes in the absolute price level. Argentina’s 45% inflation doesn’t mean that Argentine exports are very expensive, just that the Argentine currency is rapidly depreciating. Each country determines its own inflation rate (assuming a floating exchange rate).
So why do so many fully developed economies have low inflation? Because they are all trying to have low inflation. Central bankers in developed countries largely have the same mindset, and adopt pretty similar monetary policies, although the English speaking central banks are often a bit more “dovish” than Europe and Japan.
I often read pundits suggesting that the Fed was “struggling” to push inflation up to 2%. This makes me want to pull my hair out. The Fed raised its interest rate on bank reserves nine times between 2015 and 2018, and every single rate increase was specifically aimed at holding down inflation. How can anyone looking at that picture conclude that the Fed was “struggling” to push inflation up to 2%? It boggles the mind.
The interesting question, and the question that pundits should be asking, is why did the Fed believe that raising interest rates nine times would help them to hit their 2% inflation target? Why did they misjudge the situation? The most likely answer is that they were relying on faulty “Phillips Curve” models. But this has absolutely nothing to do with some sort of mythical “global forces” holding down inflation.
What “global forces” can do is hold down real interest rates. If the central bank were targeting inflation at 2%, these global forces would then also hold down nominal interest rates, perhaps to zero. Now you have an actual model of how global forces might affect monetary policy. But this model has absolutely no bearing on the Fed’s failure to hit its 2% inflation target during the 2010s. It failed because it kept raising interest rates over and over again, when it should not have been doing so.
If Turkey and India can create inflation, I assure you that developed country central banks can also do so. They simply refuse to take the necessary steps.
The list of countries above contains two types of inflation. The very high inflation rates are usually in countries that are broke, and that are printing money to pay their bills. (This can be explained by the fiscal theory of the price level.) Most of the countries with 3% to 12% inflation are not broke; they have simply chosen to adopt a more expansionary monetary policy than the US. The US itself had inflation in the range from 1966-1990. This post does not take a stand on whether China’s 3.1% inflation or India’s 4% inflation is optimal, but I suspect that inflation is pretty far down the list of pressing economic challenges facing their 2.8 billion people.