11.08.11
Economic Trends
Inflation in Developed Countries
Earlier this year we saw average consumer prices increase in the United States, largely due to increases in food and energy prices. Since then, the inflationary pressure brought on by energy prices has been largely alleviated. A similar trend has happened in most other developed countries.
Inflation rates for developed countries tend to move together although the inflation levels can vary significantly (these data are seasonally adjusted). For example, over the last few years, CPI inflation in the UK seems to be significantly higher than in Germany (and also in other G7 continental European countries not shown in the graph). Japan, not surprisingly, has the lowest inflation as this country has been struggling with deflationary pressures.
During the summer of 2008, when oil prices increased substantially, all of these countries, even Japan, experienced high levels of inflation. Something similar happened in the spring of 2011, when inflation increased to around 5 percent in Canada, the UK, and the United States. Since then, however, inflation has declined.
What has been the main driver of the increase in the inflation in early 2011? The three-month annualized inflation of energy prices (not seasonally adjusted) showed a volatile pattern in 2011. After sharply increasing in the spring, the levels reversed course. Unsurprisingly, energy prices show a very high correlation across countries, but are also more volatile in the United States than in other developed countries.
Another culprit causing high levels of inflation was elevated food inflation. A look at food-price inflation shows that food prices were at a high level in early 2011, especially in the United States, Canada, and the UK. However, food-price inflation fell less than energy inflation. Food-price inflation is still high. For example, three-month annualized food-price inflation is 5.7 percent in the United States, 4.1 percent in Canada, and 8.8 percent in the UK as of September 2011. However, we have to note that an episode of high food-price inflation is not uncommon, as the figure below suggests.
Finally, we check inflation excluding food and energy prices, frequently called core inflation in the developed countries. Most economists believe that core inflation measures are better at capturing inflationary pressures and better predictors of future inflation, as they exclude noisy signals and temporary factors.
When we look at the development of core inflation measures in the developed countries, we see several important facts. First of all, we see a lot less correlation between core inflation levels across countries than in overall inflation, food-, or energy-inflation. For example, the deflationary phase that Japan is experiencing is clearly seen in the core inflation level, which has been persistently negative since late 2008, except for a few temporary blips.
On the other hand, the UK experienced sharp increases in core inflation in early 2011, which may be related to an increase in the country’s VAT tax. For the United States and Germany, it seems that the pass-through effects of energy-price increases led to peaks in core inflation—in May for the United States and in April for Germany. Now three-month annualized core inflation has declined to 2.1 percent and to 1.5 percent, respectively. On the other hand, core inflation in Canada, which was flat in the summer after higher levels in early 2011, jumped significantly in September.
In summary, we see that in early 2011 major developed countries experienced an increase in inflation that was driven mostly by higher food and energy prices. Since then, inflation has stabilized at lower levels. The core inflation measures, though, showed; deflation in Japan, low inflation in Germany and the U.S., and higher inflation in Canada.