A few factors explain the differences. Total fiscal stimulus across Anglophone countries in 2020-21 was about 40% more generous than in other rich places, according to our estimates. It was also more focused on handouts to households (such as stimulus cheques). That may have further stoked demand. Monetary policy in the euro area and Japan was already ultra-loose before the pandemic, limiting the amount of extra stimulus central banks could provide. Britain’s inflation may also reflect an idiosyncratic factor: Brexit. It turns out that breaking with your largest trading partner causes costs to rise.
The simplest component of our ranking is the rate of core inflation. This measure gives a better sense of underlying price pressure. Among our ten countries, America leads the pack (though core inflation is above average pretty much everywhere).
A second measure, of dispersion, helps capture how broadly based price pressures are. Headline inflation being driven by one or two items—say, the cost of a restaurant meal—is less worrisome than if the price of everything is going up quickly. We divide a country’s consumer-goods basket into as many as 16 components, then calculate the share where the inflation rate exceeds 2%. In Japan just a quarter cross that threshold. But in Australia more than two-thirds do. JPMorgan Chase, a bank, breaks down Britain’s consumer-price index into 85 components, and finds that inflation rates for 69% of them are running above their 1997-2019 averages.
Inflation could also spiral if workers demand higher wages to compensate them for rising prices (and firms raise their prices in turn). Unit labour costs, which measure the relationship between what workers are paid and the value of what they produce, are rising far faster than their long-run average in many countries. On May 5th America’s statisticians revealed that these rose by 7% in the first quarter, compared with a year ago, up from a pre-pandemic average of around 2%. Michael Saunders of the Bank of England has noted that with pay deals being struck at up to 5% a year, but productivity growth of only around 1%, Britain’s unit-labour-cost growth is probably “well above the pace consistent with the inflation target [of 2%]”.
