Why is inflation so high now in the largest OECD economies?
A statistical analysis
By Anne-Sophie Fraisse (Anne-Sophie.FRAISSE@oecd.org) & Pierre-Alain Pionnier (Pierre-Alain.PIONNIER@oecd.org), Statistics and Data Directorate (OECD)
Inflation in the OECD has steadily increased since the start of 2021 (Figure 1). In March 2022 Inflation hit a 40-year high in Germany and the United States and broke records in all other G7 countries, except in Japan (Table 1). Nevertheless, current inflation levels differ across countries. Outside Japan, inflation ranges from 4.5% in France to 8.5% in the United States.
Figure 1: Inflation in most of the largest OECD economies has increased sharply since early 2021
Year-on-year inflation in consumer prices (CPI), percentage point, Jan. 2019 – Mar. 2022
Note: Inflation series for Japan and the OECD end in February 2022 in this Figure. The CPI for the OECD area is calculated as a chain-linked Laspeyres index where the weight of each country reflects its share in the sum of PPP-based individual final consumption expenditures of households and non-profit institutions serving households in all OECD countries.
Source: OECD Database on Consumer Price Indices.
Table 1: In March 2022 inflation reached record highs in most of the largest OECD economies
Note: Inflation for Japan refers to February 2022.
Source: OECD Database on Consumer Price Indices.
Food and energy significantly contribute to inflation in the largest OECD economies
Soaring energy and food prices are a global phenomenon currently pushing up inflation in most countries. Among the G7 economies, they are large contributors to inflation, explaining around 65% of the price increase over the last year in Germany and France and 80% in Italy (Figure 2). Their contribution is lower but still significant in the remaining G7 economies. The contribution of energy and food to inflation could not be calculated in Japan due to a recent change in the classification of consumption expenditures.
The very high contribution of energy prices to inflation in Italy reflects to a large extent the increase in regulated electricity and gas prices by respectively 55% and 42% in the first quarter of 2022 (ARERA, 2021). Other differences in the contribution of energy prices to overall inflation across countries largely reflect differences in the relative importance of energy in the consumption basket of households. The weight of energy in households’ consumption basket range from 5.4% in the United Kingdom to 10.4% in Germany.
The contribution of food to overall inflation in the United States and Canada reflects comparatively higher food price increases than elsewhere, whereas in Italy it largely reflects a high share of food products in households consumption.
Figure 2: The contribution of food and energy to CPI inflation varies widely across the largest OECD economies
Contributions to year-on-year CPI inflation, March 2022, percentage points
Note: Due to the recent move to a new classification of consumer expenditures and the fact that some detailed series in this new classification (COICOP 2018) are still missing, contributions to CPI inflation in Japan cannot be calculated. “Transport” covers the purchase of vehicles and transport services (division 07 in the COICOP 1999 classification), but excludes the purchase of fuels and lubricants for personal transport equipment (COICOP 07.2.2), which is accounted for with “Energy”. For Canada, “Transport” (excluding the purchase of fuels) cannot be isolated and is grouped together with the “Other” category. “Recreation and accommodation” cover both “Recreation and culture” (COICOP 09) and “Hotels and restaurants” (COICOP 11). “Housing” covers actual rentals for housing and expenditures on the maintenance and repair of dwellings, as well as imputed rentals in Canada, Germany, the United Kingdom and the United States (COICOP 04.1 to 04.3). “Food” covers food and non-alcoholic beverages (COICOP 01). “Energy” covers electricity, gas and other fuels, as well as fuels and lubricants for personal transport equipment (i.e. COICOP 04.5 and 07.2.2).
Source: OECD Database on Consumer Price Indices.
Underlying inflation is also a key driver of inflation, especially in Canada, the United Kingdom and the United States
Underlying inflation, defined as inflation excluding food and energy, is a key driver of inflation in most of the largest OECD economies (Figure 2). Even when excluding volatile food and energy prices, underlying inflation rose by 3.9% on average in Canada, France, Germany, Italy, the United Kingdom and the United States in March 2022. Nevertheless, the magnitude of demand pressures and supply constraints, as well as inflation expectations explain differences in underlying inflation across countries.
Supply-chain disruptions and pent-up consumer demand due to COVID-19 have contributed to high inflation in most countries. Recreation and accommodation, as well as transport, are among the activities most hit by lockdowns during the COVID-19 pandemic, and they contributed significantly to inflation in March 2022 (Figure 2). Tightening labour markets for low-skilled jobs driven by the economic recovery before the war in Ukraine, as well as reductions in labour supply due to health concerns in contact-intensive activities, shifts in worker preferences and restrictions to cross-border movements, likely contributed to price pressures, especially in the United Kingdom and the United States (Duval et al., 2022). Moreover, bottlenecks in the supply of semiconductors weighed on the productive capacity of the automotive sector earlier in 2021 and contributed to price increases that are still visible in year-on-year inflation rates in this sector (OECD, 2021).
Differences in the coverage of housing costs do not significantly contribute to current differences in inflation
Housing services also contribute to differences in underlying inflation across countries, with much higher contributions in Canada and the United States than in France and Italy (Figure 2). Even though international statistical guidelines provide methodological recommendations for CPI compilation (Eurostat et al., 2020), differences in the contribution of housing services to inflation could be related to differences in the coverage of housing in CPIs.
CPI measures in France and Italy only include actual rentals and expenditures related to the maintenance and repair of dwellings, while in Canada, Germany, the United Kingdom and the United States, they also include owner-occupied housing (OOH) services (see The Measure Explained Section). Leaving out OOH implies that in countries with high shares of OOH and/or with fast rising rentals, the contribution of housing services to CPI inflation is not fully captured. A way of approximating the impact of OOH services on inflation is to first increase the weight of actual housing rentals in the CPI by adding in imputed rentals using data on private consumption in the national accounts. Secondly, if actual and imputed rental prices move at a similar pace (differences would reflect differences in the structure of rented and owner-occupied housing), changes in actual rentals can be applied to the newly estimated weight for housing to gauge the effect of introducing OOH into the CPI. France and Italy are countries where imputed and actual rentals have followed similar developments over the recent years, and can therefore be used as examples for such an estimation. In this way, the treatment of OOH services in France and Italy is more consistent with the one in the other four countries.
With OOH included, the weight of actual rentals in the French CPI increases from 7.0% to 20.8% in 2020, and from 6.5% to 19.9% in 2021. In Italy, it rises from 2.9% to 18.7% in 2020, and from 2.8% to 17.4% in 2021. Despite these considerable increases in the weight of housing, the contribution of housing to year-on-year inflation rises only marginally because of a very low increase in actual rental prices in these two countries (+0.4% in France and +0.7% in Italy, as compared with +4.2% in Canada and +4.4% in the United States). In addition, the increase in the weight of housing services mechanically reduces those of other expenditures with rapidly increasing prices like energy, thus limiting the rise in headline inflation. Based on Figure 3, there is thus no clear evidence that differences in the coverage of OOH services would explain differences in the contribution of housing to overall inflation across the largest OECD economies over the recent past. Differences in the contribution of housing are probably more related to the characteristics of real-estate markets.
Looking ahead, the war in Ukraine and the economic sanctions imposed on Russia put upward pressures on commodity prices, heighten uncertainties, and are likely to dampen economic activity. This further reinforces the case for closely monitoring inflation developments in the coming months.
Figure 3: Adjusting CPIs to reflect owner-occupied housing in France and Italy marginally increases the contribution of housing services to overall inflation
Year-on-year CPI inflation based on official weights and increased weights on housing services to account for owner-occupied housing services, March 2022, percentage points
Note: Contributions to year-on-year inflation in March 2022 depend on the structure of consumption expenditures in both 2020 and 2021 (OECD, 2018). For this exercise, the CPI weights of actual rentals are aligned with the total weight of actual and imputed rentals in national accounts’ household final consumption expenditures. The other weights are uniformly rescaled downwards to ensure that the revised weights sum to unity. Since the structure of consumption expenditures in 2021 is not yet available, the average of 2019 and 2020 expenditures is used, assuming that the COVID-19 pandemic has changed the consumption structure, but only partially. In the end, the weight of actual rentals in France is increased from 7.0% to 20.8% in 2020, and from 6.5% to 19.9% in 2021. In Italy, it is increased from 2.9% to 18.7% in 2020, and from 2.8% to 17.4% in 2021.
Source: OECD Database on Consumer Price Indices, OECD calculations.
The measure explained
This Statistical Insights discusses inflation as measured by national Consumer Price Indices (CPIs) because these statistics are widely used to adjust contracts, rentals, wages, and pensions in countries. However, the European Central Bank (ECB) and the United States Federal Reserve do not use national CPIs as their target for monetary policy. The ECB relies on the Harmonised Index of Consumer Prices (HICP) to ensure cross-country comparability for assessing price stability while the Federal Reserve relies on the Personal Consumption Expenditures (PCE) deflator. Due to conceptual and measurement differences, the HICP and the PCE deflator often differ from the national CPI in France, Germany, Italy and the United States. For example, in February 2022 inflation in the United States stands at 7.8% when measured by the national CPI and at 6.4% when measured by the PCE deflator. Nevertheless, all indicators show a rapid increase in inflation in these four countries since early 2021.
The Consumer Price Index (CPI) is an index measuring the rate at which the prices of consumption goods and services are changing from one period to another. The usual method of calculation is to take an average of the period-to-period price changes for the different products, using as weights the average amounts that households spend on them. The same weights and detailed indices can be used to calculate contributions to year-on-year total inflation (OECD, 2018).
The costs of owner-occupied housing (OOH) are the costs associated with maintaining and living in an own home. There are three main approaches for including OOH costs in a CPI (Eurostat, 2017):
– The net acquisition approach measures OOH costs as the changes in the prices of dwellings and of other goods and services acquired by owner occupiers. This approach treats dwellings as any other durable goods. In line with the net principle that is followed for other expenditures, transactions of existing dwellings between households are excluded. Countries implementing this approach in their national CPI include Australia, New Zealand, Finland and the Czech Republic.
– The use approach measures OOH costs as the opportunity costs of not renting out the dwelling or not benefitting from the return on an investment of the same value on the market. These costs do not give rise to any transaction and need to be imputed, either by estimating rentals paid for similar dwellings on the market, or by summing up user costs in the form of interest and depreciation costs. A number of countries including Germany, the United Kingdom and the United States implement this approach in their national CPI by estimating equivalent rentals, while other countries such as Canada and Sweden implement it by estimating user costs.
– The payment approach measures OOH costs as the payments made by households in relation to the purchase of housing goods and services. These payments include downpayments on the purchase of dwellings, and mortgage (interest and principle) payments. Only very few countries, including Ireland, implement this approach in their national CPI.
The omission of OOH in some countries necessarily limits the international comparability of CPIs as well as their representativeness if a large share of households in these countries own the dwelling in which they live. This has led the European Central Bank to recently recommend the inclusion of OOH in the Harmonised Index of Consumer Prices (HICP) that is produced by the member countries of the euro area (ECB, 2021).
By definition, Consumer Price Indices only cover the consumption of housing services, in the form of limited maintenance and repair costs of dwellings, actual rentals, and potentially owner-occupied housing services. They do not cover major maintenance and repair costs, nor the purchase of dwellings, which are investment expenditures. Contrary to a consumption product, an investment can be sold at the end of the period where it has delivered a service. The OECD collects additional House Price Indices to track how the purchase prices of dwellings develop over time.
Where to find the underlying data?
- OECD database on Consumer Price Indices
- OECD database on National and Regional House Price Indices
- OECD House Price Tracker (to monitor differences in house price developments across countries, as well as across regions and cities within countries)
- ARERA (Italian Regulatory Authority for Energy, Networks and Environment, 2021): Press Release, 30 December 2021.
- European Central Bank (2021): Inflation Measurement and its Assessment in the ECB’s Monetary Policy Strategy Review.
- Eurostat (2017): Technical Manual on Owner-Occupied Housing and House Price Indices.
- Eurostat, ILO, IMF, OECD, UNECE and World Bank (2013): Handbook on Residential Property Price Indices.
- Eurostat, ILO, IMF, OECD, UNECE and World Bank (2020): Consumer Price Index Manual – Concepts and Methods.
- Duval R. et al.(2022): Labour Market Tightness in Advanced Economies. IMF Staff Discussion Notes No. 2022/001.
- OECD (2018): Calculation of Contributions to Overall Annual Inflation.
- OECD (2021): OECD Economic Outlook, Volume 2021, Issue 2, OECD Publishing, Paris.