Inflation cycles: evidence from international data

Summary

Focus

We introduce three complementary concepts of inflation cycles and measure them using long time series for multiple countries:

• Inflation levels capture mainly medium- and long-term developments.
• Deviation of inflation from its low-frequency trend reveals shorter-term inflation dynamics.
• A novel, simple rule of thumb identifies high and low inflation regimes.

Contribution

We apply the complementary concepts of inflation cycles across a diverse panel of advanced and emerging market economies. The three complementary inflation cycle measures that we develop broadly mirror widely used concepts in studies of business cycles, thereby filling a gap. The rule of thumb to categorise high or low inflation regimes can serve as a useful gauge for different countries. We make the cycles data publicly available.

Findings

We document several stylised facts of inflation cycles. Inflation in advanced economies is lower and more correlated than in emerging market economies. It has come down for both country types during the past few decades. The mean inflation cycle length of six to seven years across both types of economies has been very stable over the past 100 years. Inflation peaked above its long-term trend after the two World Wars, in the 1970s and 1980s (and 1990s for emerging markets) and after the Covid-19 pandemic. Emerging market economies are more likely than advanced economies to enter a high inflation regime in general, but the variation between countries is large. We also find that entering a high inflation regime is associated with a higher chance of a future recession, re-emphasising the critical role of monetary policy.

Abstract

We identify and document key stylised facts of inflation cycles for a large panel of advanced and emerging market economies. To this end, we propose three complementary inflation cycle concepts: (1) cycles in inflation levels, reflecting mostly the low- and medium-frequency components of inflation; (2) cycles in higher-frequency deviation of inflation from its trend; and (3) a categorisation of inflation into high and low inflation regimes. For each concept, we document key stylised facts within and across countries and examine how these have evolved over time. We also show that the relationship between inflation and business cycles matters: entry in a high-inflation regime is associated with a significantly higher chance of a recession in the following quarters. A cross-country dataset with the inflation cycles is made publicly available.

JEL classification: E31, F44, C53, C55

Keywords: inflation cycles, business cycle, monetary policy