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Decimal Digest
02 May 2011

The Divergence between Output Gap and Inflation

Decimal Point Analytics has developed a comprehensive measure of global consumer inflation, covering consumers in countries accounting for nearly 80% of global economic activity. The chart below shows the annual measurement of Global Consumer Inflation.

The data shows that inflation is on an upswing since the end of the great recession in 2009. A similar uptrend was seen in the previous economic expansion. However, things start to get interesting now. Let’s look at the chart below depicting Global Output Gap as estimated by Decimal Point Analytics.

In the previous economic upturn, the world did not have sufficient spare capacity, and in fact, in 2006-07 it was operating beyond boilerplate capacity. Hence, one can argue that the inflation upswing in 2003-2007 was based on real variables (alongwith monetary variables, as shown in one of our previous weeklies).

Looking at 2009-2011 period, the global economy seems to have sufficient spare capacity. Inflation is still on an upswing, and is being led primarily by higher commodity and food prices. The current rise is, thus, essentially driven by the loose monetary policies being followed by global central banks, and supported to an extent by weather anomalies & higher base demand in fast growing populous economies of China and India.


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