[I wrote this last weekend, but Jason Furman beat me to it.]
High inflation is not just the United States; Consumer inflation in Europe is well above the ECB’s 2% target. Does this mean the eurozone economy is heating up? I suspect, though, that Eurozone data is so misleading that it’s hard to be sure.
I want to start with NGDP data. The FRED database contains Eurozone NGDP data, but only until the 4th quarter of 2021. I went Eurostat To find out the cause of the delay, and discover that 2022: Q1 NGDP data is available to 18 out of 19 Eurozone members. What’s holding things up? You guessed it — Greece, a country that should never have been allowed to enter the eurozone. For its value, the performance of Eurozone NGDP towards the end of 2021 looks almost perfect. Again on the trend:
Between 2019: Q4 and 2021: Q4, the eurozone’s NGDP growth averaged around 2.2%, 2.1% inflation and 0.1% RGDP growth. So what is all this we hear about high eurozone inflation? At first I thought that perhaps their GDP deflator was growing much more slowly than their CPI. Not really. From November 2019 to November 2021, CPI inflation stood at 2.25%. The real problem is the embarrassing delay in reporting NGDP data. Eurozone CPI data are available monthly, and their CPI has risen 5 percentage points in just 5 months since November 2021. So the high eurozone inflation we read about is mostly due to recent price increases, probably related to the Ukraine war and probably other factors such as the Covid in China. (Ukraine affects Europe more than the United States.)
Matt Iglesias A tweet suggests that overall demand growth in the United States is better than in Europe:
I would say 2012 has been a year of growth Strong In the United States, however, the growth has been in AD Good In Europe – really close to perfect. US spending growth has been very strong. This claim may seem counterintuitive because our economy is doing better than the eurozone economy. But it also comes down to our relative energy supply, where we have surpassed Europe significantly. Under Bernanke, the US has done much better in controlling AD than the Eurozone, but in recent years the ECB has outperformed the Fed.
Europe has a much higher unemployment rate than the United States, but the eurozone’s unemployment rate has actually fallen far below its pre-Covid levels, actually below record levels. In contrast, the U.S. unemployment rate has only returned to pre-Kwid levels. There is a lot of demand in Europe, but not excessive demand.
To further ensure that the eurozone is not suffering from excessive demand-side inflation, I have decided to confirm the NGDP data by looking at the nominal wage increase (from Trading Economics) Again, there is no evidence of excess heat in the Eurozone:
2020: Q2 Wage spike probably represents a labor force merger problem, as lower wage service workers have lost jobs disproportionately. A year later he was wounded and since then the nominal wages have been treated well. On the contrary, US nominal wage increase Accelerated to levels inconsistent with 2% inflation:
In short, if you just look at headline inflation, the eurozone looks almost as bad as the United States. But on closer inspection, both the supply disruption and excess demand are major contributors to the US inflation problem, where the eurozone inflation problem is almost entirely supply-side. The ECB seems to be doing a great job. Keep up the good work Christine Lagarde!
PS Like me, he is 66 years old and much taller than average.
PPS. Steve Hank and John Greenwood The WSJ notes that not all countries suffer from high inflation:
We do not have the problem of global inflation. Inflation is always and everywhere a financial phenomenon caused by the creation of excess money by local central banks. China, Japan and Switzerland also face high oil prices, supply-chain problems and the aftermath of the Ukraine war, but their annual inflation rates are 2.1%, 2.5% and 2.5%, respectively. They have managed to avoid the catastrophe of inflation because their central banks have not produced excessive amounts of money.