Fall in Global Inflation Rates

Since the 1970s, we have seen a fall in average global inflation rates. There have been periods of inflation (often due to rise in oil prices), but the overall trend has seen lower inflation rates. In the 1970s, inflation was seen as one of the main macroeconomic challenges, but in the 2010s, inflation faded from view. Though the resurgence of inflation in 2022/23 shows it is not as dead as some claimed.

Global inflation shows a general fall since 1981, though there continues to be spikes in inflation. Noticeably 2008 and 2022/23

This shows the continued link between oil prices and inflation.

The spike in inflation in 2008, was mostly due to cost-push factors; in particular a rise in oil prices.

In 2022/23 the inflation was due to a rise in oil prices, plus the effect of the Covid Lockdown and resultant supply constraints, such as a surge in shipping costs when the economies re-opened. In the US especially, there was also pent-up demand due to saving during Covid, and monetary stimulus.

This graph also shows the close connection between global inflation rates. But, also how the 1970s and the oil price surge led to record post-war inflation.

Why has global inflation Generally fallen?

1. Secular stagnation – demand and supply side factors are contributing to lower rates of economic growth. There are lower demand pull pressures as economic growth rates slow down.
2. Technological changes are helping to reduce costs, especially in electronics and computing.
   Lithium batteries have become a key technology, the average cost has been falling 20% a year for many years.
3. Globalisation has increased the competitiveness of world economy. In particular the growth of low cost Chinese manufacturing, which is exporting low inflation across the world.
4. Growth of AI technology has led to new improvements as business find way to implement and cut costs, e.g. reducing labour costs by replacing with automation.
5. Glut (excess supply) in many markets, e.g. steel, automobiles, oil. This has put downward pressure on prices. A lot of this glut has come from China
6. Low wage growth. In many developed economies, we have seen stagnant wage growth – especially for lower-skilled workers. This low wage growth is due to many factors, such as globalisation and monopsony power.
7. Inflation targeting by Central banks has helped to avoid boom and bust cycles, more common in the 1970s and 1980s. For example, UK made Central Bank independent in 1997.
8. Fall in commodity prices since 2010. Oil and other commodities have fallen since 2010.
   Fall in gas prices helped reduce inflationary pressures.
9. Deflationary pressures of the Eurozone. See: Deflationary pressures in Eurozone
10. Lower inflation expectations. With fall in oil prices and decline in inflation, expectations of inflation are much lower than in the 1970s or 1980s.
11. Decline in oil reliance. Although oil prices are still influential in determining inflation, they are less influential than in the 1970s. Economies have become less dependent on oil, due to switch to electric cars and the growth of renewable energy.
12. Renewable energy has seen falling marginal costs.

There has been a fall in the average levelized cost of electricity generated from solar and wind. And in solar at least, technology continues to improve, leading to new lower cost source of electricity.

Why did inflation come back after 2022?

• Rise in oil and gas prices following Russia invasion of Ukraine
• Return of tariffs means the prospect of cheap imports from China are less than in the past. US tariffs have pushed up cost of trade.
• New sources of inflationary pressure, such as global warming, rising cost of insurance.
• Although demand has slowed down, signs of slower productivity growth mean economies reach full capacity sooner.
• Technology has been effective in reducing inflationary pressures in manufacturing, but it is harder to automate aspects of the service sector economy. Therefore, economies which spend a higher share of GDP on things like health care and education start to have less room for productivity growth. See: Baumol cost disease

Related topics

• How Inflation Affects Your Cost of Living
• Difference Between Falling Inflation and Falling Prices
• Causes of inflation

About The Author

Tejvan Pettinger

Tejvan Pettinger. Author of “Cracking Economics” “What Would Keynes Do?” – studied PPE Oxford University (1995-99) and works as an economics teacher and writer.

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