Leo Tolstoy’s observation that “all unhappy families are unhappy in their own way” applies to the multidecade-high inflation being experienced by countries around the world. The headline inflation numbers are increasingly similar—around 8% in both the U.S. and Europe—but the causes, consequences and treatment remain quite different. In particular, the U.S. has higher underlying inflation—which is potentially more persistent and is appropriately being treated with aggressive monetary tightening. In contrast, more of Europe’s inflation is imported—which makes it more painful than U.S. inflation but also likely more transitory, and so the European Central Bank should follow a comparatively restrained response.
The U.S. has had about 3 percentage points more cumulative inflation than the euro area since the onset of the pandemic. But inflation peaked in March in the U.S. and is likely to continue drifting down, while inflation rates have been rising in Europe. In the first four months of the year, inflation rose at a 12% annualized rate in Europe compared with 9% in the U.S.