What’s driving inflation in high-income countries?

This week’s charts examine cross-sectional data on inflation, supply chain disruptions and the Covid-19 pandemic.

By 
Julius Probst, PhD
 on 
December 3, 2021

With central banks having underestimated inflationary pressures over the last year, we take a brief look at some of the factors driving inflation across countries.

While there is a strong correlation between money supply growth and inflation in high-inflation countries, this relationship breaks down in high-income countries, especially when interest rates are at zero (the liquidity trap). 

The graph below plots M2 growth (a measure of the money supply that includes cash, cheque deposits and easily convertible near money) and the inflation rate across G20 countries.

Macrobond users, access the chart here

Another factor driving inflation is supply-side disruptions. Suppliers’ delivery times have increased substantially over the last year. 

In the chart below, we mapped the entire sample of G20 countries. While we see no immediate correlation because the picture is distorted by outliers like Argentina and Turkey – high-inflation countries mired in a currency crisis – a clear relationship emerges in the lower left quadrant: countries suffering from the largest increase in suppliers’ delivery times are also experiencing higher rates of inflation.

*The following two charts use data from Markit PMI, which is an add-on database.

Macrobond users, access the chart here

This example below shows how data selection and inclusion/exclusion of outliers can alter or even overturn some analyses.

Macrobond users, access the chart here


Moving on to the ongoing Covid-19 pandemic now, and despite what some believe, vaccinations are effective. The following chart – focusing on Europe and North America to “control” for seasonality – demonstrates an extremely strong correlation between the share of people vaccinated and excess mortality. Countries with higher vaccination take-up report lower mortality rates.

Macrobond users, access the chart here


The DACH region (Germany, Austria, Switzerland) continues to be severely affected by the pandemic. In Germany, the number of cases recently rose to a record. However, no new lockdown has been implemented as the country transitions to a new government. Austria, by contrast, imposed a new lockdown at the end of November. This chart from Google mobility data shows the impact that has had on Austria’s retail and recreation sector compared with Germany and Switzerland. 

Macrobond users, access the chart here


It is an understatement to say that the pandemic has made macroeconomic projections more difficult. The global pandemic has led to the highest macroeconomic volatility for advanced economies since the Great Depression. Macroeconomic forecasts are notoriously unreliable during these times, which is precisely why point estimates do not make much sense, in my opinion.

Conditional forecasts, or scenario analyses, on the other hand, are much more useful.

We recently added data from the European Central Bank’s (ECB) macroeconomic projections that compare the ECB’s inflation and GDP forecast during a mild Covid-19 wave with a severe one this winter.

Macrobond users, access the chart here

The projected inflation path is somewhat lower under a severe scenario, but only by about 50 basis points on an annual basis.

However, the GDP decline under a severe Covid-19 wave is much stronger, with real GDP expected to be some 5% lower in 2024 compared with a mild scenario.

Macrobond users, access the chart here

Finally, Macrobond recently added a financial stress index for Portugal from the Bank of Portugal. As this chart shows, financial stress during the pandemic has been significantly lower compared to during the eurozone crisis thanks to ECBs measures such as the Pandemic Emergency Purchase Programme (PEPP). 

The rolling correlation between the two-time series shows the dangerous feedback loop between sovereign risk and domestic financial stress in the banking sector, especially from 2011 to 2013. While the correlation turned positive again in 2021, the ECB’s asset purchase programs are keeping sovereign yields low and European banks liquid, meaning that a spiral between a failing banking sector and sovereign risk can be ruled out this time.

Macrobond users, access the chart here