Emerging Disinflation

Low commodity prices are containing inflation in emerging markets.

Dr. Karl Otto Pöhl, a German economist and a former President of the Bundesbank, once said: “Inflation is like toothpaste. Once it’s out, you can hardly get it back in again. So, the best thing is not to squeeze too hard on the tube.” The quote was in reference to his struggle as a central banker in the early 1980s, trying to bring German inflation under control.

Four decades later, there is a renewed struggle to contain inflation. In a reversal of traditional roles, emerging markets (EMs) are having better success in this effort than their larger cousins.

Responding to the pandemic, governments pursued extraordinary fiscal and monetary policies. Such measures created supply and demand imbalances, driving consumer prices higher. The war in Ukraine further aggravated the inflation shock. More restrictive economic policy has helped to drive inflation down from uncomfortable peaks. However, the process is taking longer than expected, especially in advanced economies (AEs).

Historically, inflation in EMs has exceeded that of AEs. Yet price rises in the developed world are running ahead of those in developing nations. Headline inflation across Asian economies moderated to a 20-month low of 2.1% year over year in May, which is half the pace of U.S. price increases and about one-third of those seen in the eurozone. China is staring at potential deflation, as consumer prices have essentially stagnated on a year-over-year basis. Major emerging economies like Brazil and India have lower inflation than Europe does.

Consumer Price Inflation