## Inflation’s Rise and Fall

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**Canonical URL:** [Inflation’s Rise and Fall](https://www.imf.org/-/media/files/publications/fandd/article/2024/09/mishra.pdf)

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### Summary findings
- Inflation began to rise in 2021 and became an acute problem for central bankers by 2022; after synchronized monetary tightening, world inflation ebbed almost as suddenly as it had risen.
- Overall finding: headline shocks and their pass-through into core inflation account for most of the rise and fall of inflation.
- Broader measures of macroeconomic slack and changes in longer-term inflation expectations generally contribute little to the international rise and fall of inflation.
- The United States is a notable exception: broad macroeconomic tightness has been a larger contributor to core inflation there than in other economies, despite a significant cooling of the labor market since early 2023.
- The fall in US headline inflation since February 2023 reflects roughly equal contributions from the cooling of the broader economy and the fading pass-through from earlier headline shocks.
- Differences in local energy price policies, including subsidies for people and businesses, explain cross-country differences in the role of energy price shocks (example: France had large price-suppressing fiscal measures and a relatively small contribution of energy to headline inflation shocks).
- Long-term inflation expectations remained well anchored through the period, supporting the effectiveness of monetary policy in defeating inflation.

### Methodology overview
- Sample: 21 advanced and emerging market economies.
- Decomposition approach:
  - Headline consumer price inflation = core (underlying) inflation + headline shocks (deviations of headline from core).
  - Core inflation explained by: long-term inflation expectations and broad measures of macroeconomic slack (unemployment rate, output gap, ratio of vacancies to unemployment).
  - Headline shocks explained by: large price changes in particular industries (food, energy, shipping) and measures of supply-chain disruptions.
  - Model allows for pass-through over time from industry price shocks to core inflation (via effects on wages and other production costs).
- Purpose: estimate contributions of headline shocks, pass-through into core, macroeconomic slack, and changes in long-term expectations to the rise and fall of inflation across countries.

### Major drivers and dynamics
- Primary driver: energy shocks and their pass-through (and their subsequent reversal) account for the bulk of the rise and fall of inflation, without requiring a deep economic slowdown.
- Global drivers dominated: synchronized global events (pandemic, mobility restrictions, fiscal and monetary support, Russia’s invasion of Ukraine) produced large global energy and food price movements that coincided with headline inflation increases.
- Local factors mattered: the extent of fiscal support, labor-market tightness, and specific energy price policies influenced national experiences of inflation.

### Country-specific notes
- United States:
  - Strong macroeconomic conditions were a more important contributor to core inflation than in other countries.
  - Since March 2024 (end of the study sample), US labor market conditions have further moderated, which should help inflation return to target.
- France:
  - Large price-suppressing fiscal measures reduced the contribution of energy to headline inflation shocks relative to other countries.

### Policy implications
- Monetary policy played a critical role: anchored long-term inflation expectations and aggressive, synchronized tightening helped defeat inflation.
- Fiscal measures that directly limit energy price exposure (subsidies or price-suppressing measures) can materially alter the contribution of energy shocks to headline inflation.
- Monitoring sectoral price shocks (energy, food, shipping) and their pass-through to wages and production costs is crucial for understanding inflation persistence and tailoring policy responses.

*Source: Mai Chi Dao, Daniel Leigh, and Prachi Mishra, “Inflation’s Rise and Fall,” F&D, SEPTEMBER 2024.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2024/09/mishra.pdf_