Inflation: stylised facts Conceptually, the term “inflation” encapsulates the notion of an erosion of the purchasing power of money.2 Inf...
Inflation: stylised facts Conceptually, the term “inflation” encapsulates the notion of an erosion of the purchasing power of money.2 Inflation can be thought of as a change in the value of the numeraire vis-à-vis all goods and services. When looked at from this perspective, in its purest form, inflation would imply a proportional and synchronous change in all prices.3 As such, it would leave the relative prices of all goods and services unchanged:
only their prices expressed in terms of the numeraire would vary. In practice, however, price changes are never perfectly synchronous. Different goods and services have different adjustment speeds. This is because the process of changing prices uses valuable firm resources and very frequent adjustments need not be optimal, especially in the presence of long-term relationships between buyers and sellers (“nominal rigidities”).4 For example, the prices of commodities are much more variable than those of, say, manufactured goods and, even more so, of services. Therefore, inflation, measured as the change in some general and comprehensive price index, will always reflect changes in relative prices in addition BIS Annual Economic Report 2022 43 to underlying inflation.
Some measures of inflation seek to partly disentangle the two, in a very rough fashion, most commonly by excluding the most volatile items. This, however, still misses the rich nature of granular price changes, both transitory and long-lasting, if not permanent. Longer-lasting ones tend to be driven by structural “real” forces, such as changes in consumer preferences and relative productivity trends. From a historical perspective, focusing on countries with a long history of price data, extended phases of high inflation have been relatively rare. The Great Inflation of the 1970s is the archetypal example. High rates of inflation have also typically followed wars. A look at cross-country historical data since 1870 (Graph 1.A) reveals that inflation was low, although volatile, over the years of the first globalisation era (1870–1914) but surged during World War I and World War II. In the aftermath of World War II, most belligerents experienced high inflation for some years (Graph 1.B). Again, the 1970s stand out for both the length and global reach of inflationary forces. Extremely high-inflation episodes, or hyperinflations,5 are even less frequent.
These typically follow periods of major political upheavals and a generalised loss of confidence in institutions. The defining characteristics of hyperinflations are large budget deficits that are increasingly directly financed by central banks (often due to the inability to collect sufficient revenues via taxes). One consequence is spiralling exchange rate depreciations.6 Telling examples include post-revolutionary France and the aftermath of World War I in the Soviet Union and Germany. More recently, some countries in Latin America experienced hyperinflation in the wake of the debt crisis of 1982, while Russia saw an inflation rate of around 2,500% in 1992 following the collapse of the Soviet Union. The dynamics of inflation vary systematically with its level along a number of dimensions, pointing to important differences between low- and high-inflation regimes. In particular, it is well known that when inflation becomes durably low, its volatility tends to fall, as does its persistence.7 However, looking under the hood at more granular price increases reveals several additional striking features.
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