As I have said, I am not an economist, just an observer and my simplification of how inflation works was intended to put us all on the same page as a basis for this note. I have spoken to two eminent economists whose views are not necessarily the same, but who have informed me on the causes of inflation. The money supplies are important, specifically when salaries do not keep up with those supplies. My construct is over-simplified, but as I have written before, “spending” by a government should include the “costs” of tax cuts, which reduce the revenue and require the input of additional funds from the treasury, thereby increasing the money supply.
Countries with independent central banks tend to have less variable inflation numbers. And cooperation between those central banks damper volatility in international markets.
HOW DOES US INFLATION COMPARE TO WORLD-WIDE INFLATION?
In this discussion I want to look at how US inflation rates relate to global inflation rates. This may not be a traditional view, but I think it is illustrative.
When I look at that data it seems that the retrospective inflation which had occurred on a global basis in the past year is remarkably synchronized with the inflation that occurred in the US over the same period. If this is true, then the implication is that our government actually has less ability to move the inflation meter than we might have preferred to believe.
This might temper how we assign blame or praise to leaders in this country when we look at the inflation numbers in their administrations.
It seems to me that rather than looking at the raw retrospective inflation numbers at any point in time, that it may be more valuable to look at the difference between the inflation seen in this country and the inflation seen elsewhere – the “Inflation Gap”.
I think these are interesting charts which illustrate how the US economy compares to the rest of the world.
What I have plotted in the graph on top is a comparison of inflation on a yearly basis in the US as compared to the average inflation globally and in the EU since 2009. I chose to look at the average global inflation rates precisely because it includes both developed and undeveloped nations - socialist, capitalist, and autocratic countries, small and large, and well-run and poorly run countries. I did not want to focus on subsets that exclude what we might consider outliers so that there would be no internal bias.
I have also included the EU as a gauge of what countries with similar political and economic systems as the US have seen occur. Some might prefer to use the G7, the G20, or the OECD (the Organization for Economic Cooperation and Development). The data for the OECD is virtually identical to the EU.
The trends in the US, the EU and the overall global economies over this period are remarkably similar. In due respect to long-term trends, I chose not to look at periods earlier, limiting this analysis to the past 4 administrations, a period of stability on the international scene. I think that the stability during this period removes some of the extraneous factors that can influence global trends. Although there were conflicts isolated around the world, none involved large groups of international allies like past clashes in Korea, Vietnam, or Kuwait.
Inflation numbers vary per year. Those measurements have some internal volatility, but we see in the chart, that those changes show synchronicity. It, therefore, may be able to be concluded that whatever factors influenced inflationary pressures, they occurred on a world-wide rather than a local scale.
For example, during the first Trump administration, although US inflation was low, it paralleled a reduction in global and EU inflation. There did not appear to be anything unique about the US economy during this period.
THE “INFLATION GAP”
The dissimilarities are better seen when you look at the differences between the US and the average global economies and the EU individually. This is what I am calling the “Inflation Gap”. The bottom two charts show how the US inflation numbers compared to those other two. Compared to the average global inflation rates, the US has had better (lower) inflation. But the US is much more closely aligned with the rates seen in the EU.
Again, following these global trends, there is little to no difference between the Inflation Gap during the Obama administration and the first Trump administration. As the global inflation rate dropped, the US maintained its Inflation Gap.
You can see that for the last 16 years the US inflation rate has averaged 2.3%, while the global rate averaged 4.2%. The US inflation rate was 1.9% LESS than that of the rest of the world. This represents a US inflation rate equal to only 55% that of the rest of the world.
This relationship remained very steady through both the Obama and first Trump administrations, but in 2021, the first year of the Biden administration, with the pandemic spread of COVID19, the global inflation rate spiked to 4.65% and the US spiked to 5.34%. Although this was transitory, I want to be complete in charting those changes. The US inflation rate was GREATER than that of the rest of the world. The US was particularly poor at dealing with the pandemic in 2020, leading into 2021. The US had the highest rate of deaths per 100,000 of population in the world. The US also had the highest rates of infection. That may have contributed to the higher effects on inflation in the US that year.
However, in 2022, the worst year for COVID19, global trade stalled, ships lined up outside ports as they could not be unloaded, consumers stayed home, businesses suffered losses that were previously unparalleled, and countries raised internal interest rates in order to damper inflation. As global inflation peaked at 8.6%, the US regained its historic advantage in the Inflation Gap. Although the US inflation rate was 7.53%, it was again LESS than the global rate.
(Incidental changes on a yearly basis are often transitional, and I point the differences out only for the sake of completeness. Again, the trend is more important than the results of a specific year. 12-month rolling rates would be a little more illustrative, but I have not seen such data.)
After the peak during 2022, inflation rates dropped to levels more consistent with the 16-year trends.
Unfortunately, that trend may have now reversed itself and in the first half year of the new Trump administration the gap between the global inflation rate and the US inflation rate has dropped to only 1.3% This may be a transitory change which will be reversed in the upcoming months, but as tariffs begin to take hold in this country, decreasing our imports, and tariffs are assessed in other countries, decreasing our exports, there will be increased pressure on inflation. Should the global marketplace begin to reorganize and shift its focus outside of the US, then we can expect that the global/US inflation gap will continue to narrow and potentially shift so that US inflation outpaces global and EU inflation.
With respect to the EU, we see that the US inflation rate was intermittently a little higher than that in the EU, but the average rate over those 16 years was 2.3% in the US and 2.2% in the EU. The trend here has also reversed in the first 6 months of 2025. We will need to pay attention to this trend as we may be seeing a period in which the US inflation rate is greater than that in the EU.
Mr. Trump’s tariffs on steel, aluminum, and copper are now showing up in prices of those metals. The Purchasing Managers Index of prices has jumped in recent months, and this a strong leading indicator of expected increases in manufactured goods.
Also, the index of pre-tariff import prices is higher than it was a year ago. This is a strong indicator that foreign countries ARE NOT eating the cost of tariffs. US importers are paying them.
So, what can we expect to happen when the inflation gap moves into positive territory (higher in the US than in the EU or the rest of the world)?
WHAT CAN WE LEARN FROM THE INFLATION GAP?
An increase in inflation means that the consumer is paying more for their goods and services today than they did 12 months ago. Remember that although countries may enact legislation, or institute policies to affect long-term inflation trends, the reported inflation rate is still just a retrospective metric.
When inflation rises without concurrent increases in consumer’s salaries it costs more to purchase discretionary items or to spend on fixed expenses.
Less cash for discretionary spending means less sales for those companies, reducing their profits which can result in a drop in their stock price, and the retirement savings accounts owned by those same consumers.
When inflation rises faster than in other countries, foreign investors are less willing to purchase US securities unless those securities have attractively high interest rates. This results in a weakened dollar. As the dollar weakens, the ability for consumers to purchase imported goods also weakens.
Keep an eye on the Inflation Gap as it may be a very good barometer of the health of the US economy.