## Inflation’s Rise and Fall

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**Canonical URL:** [Inflation’s Rise and Fall](https://www.imf.org/en/publications/fandd/issues/2024/09/inflations-rise-and-fall-dao-leigh-mishra)

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## Bibliographic details
- Authors: MAI CHI DAO, Prachi Mishra, DANIEL LEIGH
- Published: September 3, 2024

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### Overview
- Topic: Recent global inflation surge and subsequent decline.
- Timeframe emphasized: inflation began rising in 2021; became acute by 2022; fall in headline inflation observed after widespread monetary tightening; sample ends in March 2024.
- Core assertion: Recent price swings reflected largely energy- and supply-related shocks rather than macroeconomic overheating.

### Methodology
- Sample: 21 advanced and emerging market economies.
- Decomposition approach:
  - Headline consumer price inflation = underlying (core) inflation + headline shocks (deviations of headline from core inflation).
  - 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 production costs.

### Key findings
- Primary drivers:
  - Headline shocks and their pass-through into core inflation account for most of the rise and fall of inflation across the sample.
  - Broader measures of macroeconomic slack and changes in longer-term inflation expectations generally contribute little.
- Global vs local drivers:
  - Inflation’s rise and fall reflected primarily global drivers (notably energy and food prices), but local circumstances mattered.
  - Differences in local energy price policies, including subsidies, explain cross-country variation in the contribution of energy price shocks (example: France).
- United States exception:
  - The United States is a significant exception: the contribution of broad macroeconomic tightness to inflation remains greater than in other economies despite the significant cooling of the labor market since early 2023.
  - The fall in US headline inflation since February 2023 reflects equally the cooling of the broader economy and the fading pass-through from earlier headline shocks.
  - Since March 2024 (sample end), US labor market conditions have further moderated, which should help inflation return to target.
- Inflation expectations and monetary policy:
  - Long-term inflation expectations remained well anchored throughout the period.
  - This suggests central bank credibility helped prevent wage-price spirals.
  - Global tightening of monetary policy may also have helped bring down global demand and hence energy prices.

### Country examples and policy-relevant observations
- France:
  - Large price-suppressing fiscal measures and a relatively small contribution of energy to headline inflation shocks.
- Energy shocks:
  - The surge in energy and food prices, intensified by Russia’s invasion of Ukraine, triggered an energy crisis akin to the 1970s oil shocks.
  - Energy shocks and their pass-through, as well as their reversal, account for the bulk of the rise and fall of inflation, without the need for a deep economic slowdown.

### Implications for policy
- Monetary policy:
  - Maintaining credibility and anchoring long-term inflation expectations is key to preventing wage-price spirals.
  - Rapid and synchronized monetary tightening contributed to the swift decline in inflation.
- Fiscal and energy-price policies:
  - Local energy price policies, including subsidies, materially affect how energy shocks transmit to headline inflation.
  - Price-suppressing fiscal measures can reduce the contribution of energy shocks to headline inflation.
- Monitoring pass-through:
  - Policymakers should monitor the pass-through from headline shocks to core inflation (via wages and production costs) when assessing inflation persistence and appropriate policy responses.

*Source: "Inflation’s Rise and Fall" — MAI CHI DAO, Prachi Mishra, DANIEL LEIGH; F&D Magazine; September 2024.*

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- **Inflation’s Rise and Fall**
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_Source: https://www.imf.org/en/publications/fandd/issues/2024/09/inflations-rise-and-fall-dao-leigh-mishra_