Jongrim Ha, M. Ayhan Kose, Franziska Ohnsorge 17 August 2021 Policymakers would like inflation to be neither too high nor too low for obvious reasons. Low and stable inflation has generally been associated with faster growth and more stable output and employment whereas both very low and very high inflation have been associated with macroeconomic challenges (Schmidt 2021, Fell et al. 2021, Gersbach 2021). Over the past 18 months, global inflation has displayed highly volatile movements (Ha et al. 2021a). During the pandemic-induced global recession of 2020, it registered the most muted and shortest-lived decline of any of the five global recessions over the past half-century. It then recorded the fastest increase since May 2020. The recent volatility
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Jongrim Ha, M. Ayhan Kose, Franziska Ohnsorge 17 August 2021
Policymakers would like inflation to be neither too high nor too low for obvious reasons. Low and stable inflation has generally been associated with faster growth and more stable output and employment whereas both very low and very high inflation have been associated with macroeconomic challenges (Schmidt 2021, Fell et al. 2021, Gersbach 2021).
Over the past 18 months, global inflation has displayed highly volatile movements (Ha et al. 2021a). During the pandemic-induced global recession of 2020, it registered the most muted and shortest-lived decline of any of the five global recessions over the past half-century. It then recorded the fastest increase since May 2020. The recent volatility has led to an intensive discussion about inflation prospects (Summers 2021, Blanchard 2021, Ball et al. 2021, Gopinath 2021, Ha et al. 2021a).
To understand how inflation, at the global level, responds to the global business cycle requires a comprehensive database that covers a truly global set of countries for a long period (Ha et al. 2021b). To this end, we introduce a global database that contains inflation series: (1) for a wide range of inflation measures, (2) at multiple frequencies for an extended period (1970-2021), and (3) for a large number of (up to 196) countries. The database is updated twice a year and publicly available.
After providing information about the new database, we illustrate its potential use with three applications: (1) the evolution of inflation since 1970, (2) the behaviour of inflation during global recessions, and (3) synchronisation of inflation across countries.
A global database of inflation
The database includes six measures of inflation: headline, food, energy, core consumer price index (CPI) inflation, producer price index (PPI) inflation, and GDP deflator changes at monthly, quarterly, and annual frequencies. Data sources for the new database include a large number of country-specific sources (central banks and statistical offices) along with cross-country inflation data available from international organisations, including the World Bank, International Monetary Fund, International Labour Organisation, OECD, and UN.
As a result of the data compilation across many global and national sources, our database has a significantly larger coverage across the six inflation measures – up to 196 countries for 1970-2021 – than other databases. For some of the six inflation measures, the number of observations of the monthly, quarterly, and annual series is much larger than that in other sources (Figure 1). Another major contribution of the new database is its coverage of much longer inflation series. For example, our database includes annual data from 1970 for 155 countries, whereas other databases offer such data only for 105 countries.
Figure 1 Coverage of inflation series
Source: Ha et al. (2021a).
Note: CPI=consumer price index; PPI = producer price index, GDP=gross domestic product. Number of country-year observations of annual series over 1970-2020 in Ha et al. (2021a, ‘new’), or other databases (‘others’). Other databases refer to the next-largest publicly available source for each inflation measure.
Multi-decade decline in global inflation
Using the new database, we first document the broad-based disinflation around the world over the past half-century (Ha et al. 2019, Figure 2). Trend disinflation over the past five decades is visible in all measures of inflation, in most countries, all regions, and all components of inflation. Global inflation (median across headline CPI inflation in 155 countries) fell from a peak of roughly 17% in 1974 to 2.5% in 2020. In advanced economies, it has fallen steadily since the mid-1980s and in emerging market and developing economies (EMDEs) since the mid-1990s. In EMDEs, inflation declined from a peak of 17.5% in 1974 to 3.1% in 2020; in low-income countries (LICs), it fell from a peak of 25.2% in 1994 to 4.1% in 2020.
Figure 2 Global CPI inflation
Sources: Ha et al. (2019, 2021a), World Bank.
Note: Median headline CPI inflation based on a balanced set of 155 countries, including 29 advanced economies and 126 EMDEs. Average and GDP-weighted average global inflation rates are based on 193 countries. Annual inflation over 50% are excluded from the sample.
Less pronounced inflation decline during the 2020 global recession
Second, we examine the behaviour of inflation during global recessions (Kose et al. 2021). During these episodes, global inflation fell steeply – and continued to fall for one to three years past the trough of the global recession.
In the Covid-19-induced global recession of 2020, as a result of the widespread economic disruptions, global inflation also declined – but more briefly and less steeply than in previous global recessions (Figure 3). Since data for most previous global recessions is only available on a quarterly basis, we compare four-quarter rolling average inflation rates around the troughs of the five global recessions since 1970 (1975, 1982, 1991, 2009, and 2020). Whereas in previous global recessions, global inflation declined by 6.2 percentage points, on average, between the trough of the global recession and the subsequent trough of global inflation, it declined by only 0.7 percentage point in the global recession of 2020.
The rebound was also faster. Whereas global inflation continued to fall for one to three years after previous global recessions, it began to rise in less than one year in the global recession of 2020. Or, based on monthly data, it took global inflation 13 months to stop falling in the 2009 global recession, but only four months in the pandemic-induced recession of 2020 (Ha et al. 2021a).
Figure 3 Global inflation during global recessions
Sources: Kose et al. (2021), World Bank.
Note: Horizontal axes indicate years before and after the troughs of global recessions (shaded area, t=0). Global inflation is defined as median headline CPI inflation (four-quarter rolling average of quarterly annualised inflation) across 76 countries, consisting of 25 advanced economies and 51 EMDEs. The trough of the 2020 global recession is assumed to be the second quarter of 2020.
Higher synchronisation of inflation over time
We also analyse global inflation synchronisation across a wide range of countries and inflation measures using a dynamic factor model and the new database. This application expands on earlier studies that relied on fewer inflation measures for mostly advanced-economy data.
Our results suggest that global inflation synchronisation has broadened over the past half-century – across different groups of countries and different types of goods (Forbes 2019, Figure 4). The degree of inflation synchronisation was much higher for advanced economies than EMDEs for 1971-2020. Specifically, it was largest for import prices (55%), followed by PPI, headline CPI, GDP deflator, and core CPI (10%). In the 1970s and early to mid-1980s, the extent of inflation synchronisation was pronounced only for inflation measures with a large portion of tradable goods and services (import prices and producer prices). Since the early 2000s, it has more recently become sizeable across all inflation measures and has grown to around one-quarter even for core CPI inflation and GDP deflator growth.
Figure 4 Inflation synchronisation: Contributions of common factors to inflation variance
Source: World Bank.
Note: CPI=consumer price index; PPI = producer price index, GDP=gross domestic product. The global inflation factor is estimated with a dynamic factor model (two-factor model) for annual inflation in 38 countries (25 advanced economies and 13 EMDEs) for the period of 1971-2020. ‘CPI’, ‘IMP’, ‘PPI’, ‘CORE’, ‘DEF’ indicate inflation in headline CPI, import prices, PPI, core CPI, and GDP deflator, respectively. Long-term trend is eliminated using 15-year moving average. All numbers refer to sample medians.
The new database constitutes a one-stop source for inflation data that can be used to analyse many questions. For example, it is possible to examine the contributions of long-term structural changes to global disinflation over recent decades by combining the new database with other economic variables that reflect country characteristics. One can also study the links between country-specific business cycles and inflation, expanding on our analysis of inflation developments during global recessions.
Authors’ note: The findings, interpretations, and conclusions expressed in this column are entirely those of the authors. They do not necessarily represent the views of the World Bank, its Executive Directors, or the countries they represent.
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Blanchard, O (2021), “In Defense of Concerns over the $1.9 Trillion Relief Plan”, Peterson Institute for International Economics blog, 18 February.
Fell, J, T Peltonen and R Portes (2021), “Lower for Longer – Macroprudential Policy Issues Arising from the Low Interest Rate Environment?”, VoxEU.org, 2 June.
Forbes, K J (2019), “Inflation Dynamics: Dead, Dormant, or Determined Abroad?”, Brookings Papers on Economic Activity 2019(2): 257-338.
Gersbach, H (2021), “Another Disinflationary Force Vanishes: The Tightening of Bank Equity Capital Regulation”, VoxEU.org, 18 February.
Gopinath, G (2021), “Structural Factors and Central Bank Credibility Limit Inflation Risks”, IMF Blog, 19 February.
Ha, J, M A Kose and F Ohnsorge (eds.) (2019), Inflation in Emerging and Developing Economies: Evolution, Drivers, and Policies, Washington, DC: World Bank.
Ha, J, M A Kose and F Ohnsorge (2021a), “Inflation During the Pandemic: What Happened? What is Next?”, CEPR Working Paper DP 16328.
Ha, J, M A Kose and F Ohnsorge (2021b), “One-Stop Source: A Global Database of Inflation”, CEPR Working Paper DP 16327.
Kose, M A, N Sugawara and M E Terrones (2021), “What Happens During Global Recessions?”, In M A Kose and F Ohnsorge (eds.), A Decade after the Global Recession: Lessons and Challenges for Emerging and Developing Economies, 55-114. Washington, DC: World Bank.
Schmidt, S (2021), “Avoiding a Self-fulfilling Low-inflation Trap?”, VoxEU.org, 6 July.
Summers, L (2021), “The Inflation Risk is Real”, Washington Post, 24 May.