Inflation has become a global problem

Today's inflationary surge is being felt not just by the advanced economies but also by the majority of emerging markets and developing economies. And though its causes vary across countries, the task of resolving the problem ultimately will fall to the world's major central banks.

Inflation has come back faster, spiked more markedly, and proved to be more stubborn and persistent than major central banks initially thought possible.

This inflationary surge is not limited to wealthy countries. Emerging markets and developing economies have been hit by a similar wave, with 78 out of 109 EMDEs also confronting annual inflation rates above 5%.

But the disparity between advanced and developing economies is even greater than this comparison suggests, because many emerging markets and developing economies EMDEs were already experiencing declines in per capita income before the pandemic, whereas advanced economies were mostly at new highs.

One development that is common across advanced and developing economies is the increase in commodity prices alongside rising global demand. As of January 2022, oil prices were up 77% from their December 2020 level.

Another major issue affecting advanced and developing economies alike is global supply chains, which continue to be severely affected by the events of the past two years.

Transport costs have skyrocketed. And unlike the oil-based supply shock of the 1970s, the COVID-19 supply shocks are more diverse and opaque, and therefore more uncertain, as the World Bank’s most recent Global Economic Prospects stresses.

Worse, food price inflation also generally hits lower-income countries (and lower-income households everywhere) particularly hard, which makes it tantamount to a regressive tax.

Food accounts for a much larger share of the average household consumption basket in EMDEs, which means that inflation in those economies is likely to prove persistent. Today’s higher energy prices will translate directly into higher food prices tomorrow (through higher costs for fertilizer, transport, and so forth).

To be sure, a more timely and robust policy response from major central banks would not be good news for EMDEs in the short run. Most would experience higher funding costs, and debt crises could become significantly more likely for some.