For release on delivery
3:00 a.m. EDT (9:00 a.m. local time)
October 8, 2024
The Global Fight Against Inflation
Remarks by
Adriana D. Kugler
Member
Board of Governors of the Federal Reserve System
at the
Conference on Monetary Policy 2024: Bridging Science and Practice
European Central Bank
Frankfurt, Germany
October 8, 2024
Thank you, Isabel, and thank you for the opportunity to speak here at the ECB
today.1 I am particularly pleased to be part of this year's conference because the theme
you have chosen has, for some time now, also been a theme of my career as an academic
and public servant. Every day, of course, central bankers must bridge science and
practice, drawing on the insights that research provides, specifically, because the
economy and the world are continuously subject to new circumstances. We must do so,
and put those insights into practice, because everyone in the United States, and in Europe,
and around the world, depends on a healthy and growing economy, and depends on
policymakers making the right decisions to help keep it that way.
But well before I came to the Federal Reserve, I was also bridging science and
practice. First, as a labor economist, when, for example, I was exploring how
employment, productivity, and earnings are influenced not only by educational
attainment and experience, but also by policies. Later, as chief economist at the
Department of Labor, I brought science to bear in carrying out its mission of supporting
workers. As the U.S. representative at the World Bank, economic science was likewise
crucial in deciding how to best direct the institution's resources to where they were
needed the most. In each of these roles, I have learned a bit more about the need to
balance rigorous scientific understanding of the problems that people face with the real-
world experiences of those people, which sometimes do not fit so neatly into an
economic theorem or principle.
Most recently, my colleagues and I on the Federal Open Market Committee
(FOMC) have been focused on the very practical task of reducing inflation while keeping
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employment at its maximum level. To understand the recent experience of high inflation
in the United States, it is helpful to consider how inflation behaved around the world after
the advent of the COVID-19 pandemic. In the remainder of my remarks, I will discuss
the global dimensions of the recent bout of high inflation in different economies, both
comparing similarities and contrasting differences, with a special emphasis on the factors
that enabled the United States to achieve disinflation while having stronger economic
activity relative to its peers. I will then conclude with some comments on the U.S.
economic outlook and the implications for monetary policy.
Starting with the similarities in our inflationary experiences, in early 2020, a
worldwide pandemic disrupted the global economy and ultimately caused a surge of
inflation around the world. Global goods production was hobbled, transportation and
other aspects of supply chains became entangled, and there were significant labor
shortages, all combining to cause a severe imbalance between supply and demand in
much of the world. Sharp increases in commodity prices were exacerbated by Russia's
invasion of Ukraine. The result was a global escalation of inflation. As you can see by
the black line on slide 2, a measure of world headline inflation in 26 economies
accounting for 60 percent of global gross domestic product (GDP) rose to a degree that
had not been experienced since the early 1980s.
This worldwide increase of inflation was synchronized and widespread across
advanced and emerging economies. To measure the synchronization and breadth of this
inflationary period, Federal Reserve Board researchers have employed a dynamic factor
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model to estimate a common component of inflation across these 26 economies.2 As you
can see by the blue line on slide 2, the estimated global component accounts for a large
share of the variation of headline inflation among these economies after inflation began
rising sharply in 2021. This evidence is consistent with the familiar story of widespread
lockdowns, shutdowns of manufacturing plants in different parts of the world, disrupted
logistic networks, increases in shipping costs, and longer delivery times. In the recovery,
we also saw globally higher demand for commodities, intermediate inputs, and final
goods and services, with demand exceeding a still-constrained supply.
Indeed, one important contributor to the recent co-movement in inflation across
the world has been food and energy prices. As you know, most of the time variations in
inflation are heavily influenced by food and energy prices, which tend to be more volatile
than the prices for other goods and services. Because many food and energy
commodities are traded internationally, retail prices paid by consumers also tend to have
some degree of global synchronization. Thus, as you would expect, the black line in the
left chart on slide 3 shows that food and energy inflation faced by consumers around the
world-here called noncore inflation-rose substantially in the recent inflationary
episode. Moreover, world noncore inflation is largely accounted for by its global
component in yellow, thus also showing a high degree of global synchronization.
Another thing we can say about the recent worldwide escalation of inflation is
how widely diffused it was across different price categories. Core inflation excludes food
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and energy prices, and it includes many categories more exposed to domestic conditions
such as housing and medical services. Yet, as shown by the black and red lines in the
right chart on slide 3, the recent rise in core inflation showed a high degree of global
synchronization, with the global component accounting for a large share of the post-
pandemic inflation. Looking back in history, this is the first time since the 1970s that we
saw a rise in core inflation so widespread across such a large number of countries.
Moreover, underlying this rise in core inflation in the United States and other advanced
economies, research carried out by Federal Reserve Board economists shows that there
was a widespread rise in prices across the whole range of categories within the core
basket.3
Academics and policymakers have debated about the possible reasons explaining
the recent co-movement of inflation around the world. The COVID-19 pandemic was a
global phenomenon and had effects on supply and demand that were similar in many
countries. On the supply side, businesses closed, affecting goods production and the
provision of services. There were labor shortages due to illness, social distancing, early
retirements, and declines in immigration, with all of these factors making it harder to
produce goods and services.4 Production disruptions and labor shortages propagated
3
I refer to updated estimates from the following works: Hie Joo Ahn and Matteo Luciani (2020),
"Common and Idiosyncratic Inflation," Finance and Economics Discussion Series 2020-024 (Washington:
Board of Governors of the Federal Reserve System, March; revised August 2024),
https://doi.org/10.17016/FEDS.2020.024r1; and Eli Nir, Flora Haberkorn, and Danilo Cascaldi-Garcia
(2021), "International Measures of Common Inflation," FEDS Notes (Washington: Board of Governors of
the Federal Reserve System, November 5),
https://www.federalreserve.gov/econres/notes/fedsnotes/international-measures-of-common-inflation-20211105.html.
4
See Danilo Cascaldi-Garcia, Musa Orak, and Zina Saijid (2023), "Drivers of Post-Pandemic Inflation in
Selected Advanced Economies and Implications for the Outlook," FEDS Notes (Washington: Board of
Governors of the Federal Reserve System, January 13),
https://www.federalreserve.gov/econres/notes/fedsnotes/drivers-of-post-pandemic-inflation-in-selected-advanced-economies-and-implications-for-theoutlook-20230113.html.
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around the world due to long and intricate supply chains forged over several decades of
growing globalization in trade. The imbalance between supply and demand widened as
consumers switched their spending from services to goods, straining transportation
capacity that further disrupted supply chains.5 This re-allocation of demand from
services to goods also strained the ability of firms to produce, as they struggled to find
qualified workers due to the needed re-allocation of workers across sectors.6 This
demand was also likely fueled by the fiscal response to COVID-19 in 2020 and 2021.
All of these factors drove up costs, and there were others. Russia's war on Ukraine
intensified the increases in energy and food commodity prices during the recovery from
the pandemic. And the interaction of these different forces also likely played a role.7 For
example, as Asia increased production to meet higher demand for goods in the U.S., this
may have driven up wages and other input costs in Asia, increasing demand for imports
from other places and, in turn, raising costs there, and so on. My assessment is that both
supply and demand contributed to the recent global inflationary episode, including in the
United States, with international trade of goods, including commodities, and services
playing an important role in disseminating these forces around the world.
One salient aspect of past inflationary episodes is the observation that core
inflation typically falls more slowly than it increases. As we can see by the red lines on
slide 4, world core inflation rose more quickly than it decreased in the three most recent
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episodes of significant inflation and disinflation-from a trough in 1972 to a new trough
in 1978; from 1978 to a trough in 1986; and then the recent episode, from the end of 2020
through the first quarter of 2024. In these episodes, the escalation of four-quarter core
inflation increased by an average of 7/10 percentage point per quarter to its peak, while it
decreased by an average of only 3/10 percentage point per quarter to the trough.8
Still, it is important that central bankers not only compare similarities across
economies in the recent inflation fight, but also contrast the differences. Notably, another
important feature of the last three inflation and disinflation periods is that though the
share of core inflation explained by the common component increases when inflation
rises, this share decreases when inflation falls, as can be seen by the black shaded areas of
the three panels on slide 4. This suggests that while the reasons underlying the co-
movement of inflation across the world-such as global supply disruptions and
commodity price shocks-may have been important when prices were increasing, they
have been less important when prices have decreased. This evidence indicates that
factors that vary from economy to economy become more relevant in the disinflationary
period.
Economic researchers have raised several possible explanations for the different
inflation trajectories experienced by different economies during this post-pandemic
period. For example, some point to differences in the magnitudes of the demand and
supply imbalances driven by the shutdown and reopening of each economy, with this
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imbalance possibly playing a larger role on inflation in the euro area relative to the
United States.9 While noting that differences in the size of fiscal stimulus in different
countries were likely important, the targeting of that stimulus also differed, in some cases
with a greater emphasis on addressing supply disruptions.10 Global factors also affect
various economies differently, with studies showing that the exposures to fluctuations in
commodity prices are an important issue.11 For instance, Europe was heavily affected by
natural gas shortages related to Russia's war on Ukraine, while gas supplies in the United
States were more plentiful during this period. Also, supply chains were untangled at
different speeds in different parts of the world, with, for instance, low water levels in the
Panama Canal and attacks in the Red Sea by Houthi rebels affecting different shipping
routes differently around the world. And, last but not least, differences in labor market
tightness very likely played a role, with evidence pointing to its importance in the United
States in driving up nominal wage growth, a factor that likely helped keep employment
and economic activity at healthy levels.12
9
See Domenico Giannone and Giorgio Primiceri (2024), "The Drivers of Post-Pandemic Inflation," NBER
Working Paper Series 32859 (Cambridge, Mass.: National Bureau of Economic Research, August),
https://www.nber.org/papers/w32859.
10
For the economic effects on the size of fiscal stimuli, see Oscar Jorda and Fernanda Nechio (2023),
"Inflation and Wage Growth since the Pandemic," European Economic Review, vol. 156, 104474.
11
See Christiane Baumeister, Gert Peersman, and Ine Van Robays (2010), "The Economic Consequences
of Oil Shocks: Differences across Countries and Time," in Renee Fry, Callum Jones, and Christopher
Kent, eds., Inflation in an Era of Relative Price Shocks (Sydney: Reserve Bank of Australia), pp. 91-128,
https://www.rba.gov.au/publications/confs/2009/pdf/conf-vol-2009.pdf; and Andrea De Michelis, Thiago
Ferreira, and Matteo Iacoviello (2020), "Oil Prices and Consumption across Countries and U.S.
States," International Journal of Central Banking, vol. 16 (March), pp. 3-43.
12
For the effects of labor market tightness on price and wage inflation, see Olivier J. Blanchard and Ben S.
Bernanke (2022), "What Caused the U.S. Pandemic-Era Inflation?" NBER Working Paper Series 31417
(Cambridge, Mass.: National Bureau of Economic Research, June), https://www.nber.org/papers/w31417;
Olivier J. Blanchard and Ben S. Bernanke (2024), "An Analysis of Pandemic-Era Inflation in 11
Economies," NBER Working Paper Series 32532 (Cambridge, Mass.: National Bureau of Economic
Research, May), https://www.nber.org/papers/w32532.
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Researchers at the Board of Governors also find that differences in the pace of
disinflation across countries have been largely driven by different trajectories of services
price inflation.13 As shown on slide 5, they find that the dispersion of inflation across
countries peaked in 2023 and has been declining since then for headline and core goods,
but not so much for core services inflation, with housing developments helping to
account for the differences in services inflation. Other cross-country research suggests
that wage developments help explain services inflation dynamics.14 Indeed, services
inflation from both the United States and the euro area have been elevated. Still, while
U.S. housing services inflation has been running higher than the wage-driven nonhousing
component, the reverse is true in the euro area.
While the cross-country differences during the recent bout of high inflation have
emerged more prominently during the disinflationary period, economic growth has been
very heterogenous since the onset of the COVID-19 pandemic. Generally speaking, the
U.S. has experienced a significantly stronger recovery than other advanced economies.
As we can see in the left panel on slide 6, real GDP has grown substantially more in the
United States since 2021. This is also the case with respect to the larger components of
GDP, such as consumption and investment, shown in the right two panels.
In explaining why the U.S. has managed to bring down inflation and experience
strong economic activity, I believe that the combination of restrictive monetary policy
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together with convex supply curves can help explain these developments.15 In addition,
there are three supply-related factors that have also made significant contributions to the
combination of rapid disinflation together with continued and resilient growth.
First, there are important factors that have affected total factor productivity
differently across countries. For instance, the U.S. has seen greater business dynamism,
as reflected in a higher rate of new business formation, shown in the left panel on slide 7.
This is important because while most new firms fail, a small share of those that survive
grow rapidly and make significant contributions to aggregate productivity.16 Moreover,
the pandemic-era business creation surge has been particularly strong in high-tech
sectors, such as computer systems design as well as research and development services.17
In fact, we have also seen greater growth in total factor productivity in the U.S. relative to
other advanced economies, as shown in the right figure on slide 7. In addition, while the
artificial intelligence (AI) technology is still in its nascency, U.S. businesses across
different sectors of the economy are investing in and adopting AI. According to the
Business Trends and Outlook Survey of the Census, more than 20 percent of companies
in 15 sectors have adopted AI.18 It may be too early to tell, but additional productivity
15
See Adriana D. Kugler (2024), "Disinflation without a Rise in Unemployment? What Is Different This
Time Around," speech delivered at the 2024 Stanford Institute for Economic Policy Research Economic
Summit, Stanford University, Stanford, Calif., March 1,
https://www.federalreserve.gov/newsevents/speech/kugler20240301a.htm.
16
See Titan Alon, David Berger, Robert Dent, and Benjamin Pugsley (2018), "Older and Slower: The
Startup Deficit's Lasting Effects on Aggregate Productivity Growth," Journal of Monetary Economics, vol.
93 (January), pp. 68-85; and Ryan Decker, John Haltiwanger, Ron Jarmin, and Javier Miranda (2014),
"The Role of Entrepreneurship in U.S. Job Creation and Economic Dynamism," Journal of Economic
Perspectives, vol. 28 (Summer), pp. 3-24.
17
See Ryan Decker and John Haltiwanger (2024), "High Tech Business Entry in the Pandemic Era," FEDS
Notes (Washington: Board of Governors of the Federal Reserve System, April 19),
https://www.federalreserve.gov/econres/notes/feds-notes/high-tech-business-entry-in-the-pandemic-era20240419.html.
18
In data released September 23, 2024, the share of firms reporting the use of AI to perform tasks
previously done by employees in producing goods or services was 27 percent.
gains may be coming from tasks that are enhanced by AI through process
improvements.19
Second, we have seen a stronger rate of labor productivity growth in the United
States as shown in the left panel on slide 8.20 The economic policy response to the
pandemic in the U.S. was robust, but it was different from the response in many other
advanced economies. In other economies, the emphasis was on maintaining employment,
and specifically keeping workers employed in their existing firms when the pandemic
arrived. This was the case, for example, in the euro area, and the middle panel indeed
shows that the unemployment rate peaked several times higher in the United States. This
approach minimized euro-area job losses, but it may have limited the flow of workers to
more-productive sectors of the economy, which is supported by Federal Reserve Board
research showing substantially more sectoral re-allocation of workers in the United States
compared to the euro area, as seen in the right figure on slide 8.21
Third, the U.S. labor supply has grown in the post-pandemic period. The labor
force participation rate increased solidly, especially from the beginning of 2021 through
the middle of 2023, and the U.S. population increased strongly because of high levels of
immigration. While recent immigration flows into some European countries have been
comparable in proportion to those into the U.S., as seen in the left figure on slide 9, new
19
See Lisa D. Cook (2024), "Artificial Intelligence, Big Data, and the Path Ahead for Productivity," speech
delivered at "Technology-Enabled Disruption: Implications of AI, Big Data, and Remote Work," a
conference organized by the Federal Reserve Banks of Atlanta, Boston, and Richmond, Atlanta, October 1,
https://www.federalreserve.gov/newsevents/speech/cook20241001a.htm.
20
See Francois de Soyres, Joaquin Garcia-Cabo Herrero, Nils Goernemann, Sharon Jeon, Grace Lofstrom,
and Dylan Moore (2024), "Why Is the U.S. GDP Recovering Faster than Other Advanced Economies?"
FEDS Notes (Washington: Board of Governors of the Federal Reserve System, May 17),
https://www.federalreserve.gov/econres/notes/feds-notes/why-is-the-u-s-gdp-recovering-faster-than-otheradvanced-economies-20240517.html.
21
See Joaquin García-Cabo, Anna Lipińska, and Gaston Navarro (2023), "Sectoral Shocks, Reallocation,
and Labor Market Policies," European Economic Review, vol. 156 (July), 104494.
immigrants may have contributed relatively more to U.S. growth because they often
integrate more quickly into the labor force, as seen in the right figure.22
Finally, and turning our focus to monetary policy, this stronger economic
performance, with falling inflation, has allowed the FOMC to be patient about the timing
in reducing our policy rate. This performance gave us time to strongly focus on the
inflation side of our mandate. And this, together with the bump in inflation early this
year, helps explain why we began to ease monetary policy to less-restrictive levels only
after other central banks of advanced economies had done so. But now, the combination
of significant ongoing progress in reducing inflation and a cooling in the labor market
means that the time has come to begin easing monetary policy, and I strongly supported
the decision by the FOMC in our September meeting to cut the federal funds rate by 50
basis points.
Looking ahead, while I believe the focus should remain on continuing to bring
inflation to 2 percent, I support shifting attention to the maximum-employment side of
the FOMC's dual mandate as well. The labor market remains resilient, but I support a
balanced approach to the FOMC's dual mandate so we can continue making progress on
inflation while avoiding an undesirable slowdown in employment growth and economic
expansion. If progress on inflation continues as I expect, I will support additional cuts in
the federal funds rate to move toward a more neutral policy stance over time.
Still, my approach to any policy decision will continue to be data dependent and
to rely on multiple and diverse sources of data to form my view of how the economy is
evolving. For instance, I am closely monitoring the economic effects from Hurricane
Helene and from geopolitical events in the Middle East, since these could affect the U.S.
economic outlook. If downside risks to employment escalate, it may be appropriate to
move policy more quickly to a neutral stance. Alternatively, if incoming data do not
provide confidence that inflation is moving sustainably toward 2 percent, it may be
appropriate to slow normalization in the policy rate.
As I have described, the escalation of inflation unleashed by the pandemic was
global in scope, and the fight to reduce inflation has also been global. Each of our
economies faces its own unique mixture of challenges, but by comparing our similarities
and contrasting our differences, I believe we can learn from each other's experiences.
In conclusion, let me thank those of you in this room who contribute to bridging
science and practice. For those working on the policy side, thank you for the hard work
you do each day to analyze the economic data that allows not only policymakers like me,
but also consumers and businesses to gain a better understanding of ongoing
developments in the global economy. On the academic side, thank you for your
creativity and ingenuity in asking policy-relevant questions and pushing the boundaries
of our understanding of an ever-changing economic landscape.
The Global Fight Against
Inflation
Adriana D. Kugler
Member
Board of Governors of the Federal Reserve System
at
Conference on Monetary Policy 2024: Bridging Science and Practice
European Central Bank
Frankfurt, Germany
October 8, 2024
Slide 1
Global Components of World Inflation
Global Components of World Inflation
World Core Inflation in Inflationary Periods
Share of Global vs Idiosyncratic Components
Dispersion in Inflation Across Countries
Price categories
Slide 5
Overview of Economic Indicators since 2005
Entrepreneurship and TFP
Labor Market: Productivity and Developments
Demographic Factors