Why rising inflation is a global – not local – phenomenon

Core inflation in the euro area started out roughly 1 percentage point lower than in the US, and this difference accounts for about half the current inflation difference. It’s also important to note that low euro-area inflation before the pandemic was a bad thing: There’s a broad consensus among economists that monetary authorities should target somewhat positive inflation, at least 2 per cent, to give them room to cut interest rates in recessions. European inflation has been low because its policymakers have consistently been too conservative.

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Still, what about the other half of the inflation difference? As I said, I’ve been down various rabbit holes, and I still don’t have an explanation. But I may have been searching for too much precision. After all, reported inflation rates are significantly different within the euro area, with Germany’s about 1.5 points above France’s and Italy’s. There might be real economic reasons for these differences, but how much is just statistical noise?

At one point in his magnum opus, The General Theory of Employment, Interest and Money, John Maynard Keynes remarked that “to say that net output today is greater, but the price level lower, than 10 years ago or one year ago is a proposition of a similar character to the statement that Queen Victoria was a better queen but not a happier woman than Queen Elizabeth — a proposition not without meaning and not without interest, but unsuitable as material for the differential calculus”. Keynes was actually making a dubious case for measuring everything in wage units, but I’ve always cited that line as a caution about taking economic measures too seriously.

In the case of inflation, I’d say that the moral of the story is not to dwell too much on international differences in the latest print. The important point is that we’ve seen broadly similar inflation surges in many countries. Which tells you that what’s happening in the US isn’t mainly about policy.