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Inflation Indicator

Description

This indicator measures the government’s commitment to sound monetary policy.

Relationship to Growth & Poverty Reduction

Research shows that high levels of inflation are detrimental to long-run growth.81 High inflation creates an environment of risk and uncertainty, drives down the rate of investment, and is often associated with distorted relative prices and tax incentives.82 Inflation can also hinder financial market development and create incentives for corruption.83 In addition, inflation often has a direct negative impact on the poor. When inflation is associated with swings in relative prices, it usually erodes real wages and distorts consumption decisions.84

Methodology

This indicator measures the most recent one-year change in consumer prices. The indicator reflects average annual percentage change for the year, not end-of-period data.

In keeping with economic research findings, MCC considers countries with inflation below 15% to be passing this indicator.

MCC relies exclusively on the IMF’s WEO database for inflation data. WEO inflation data reflect annual percentage change averages for the year, not end-of-period data. FY25 data refer to the 2023 inflation rate. As better data become available, the IMF makes backward revisions to its historical data.

Footnotes
  • 81. Bruno, M., and W. Easterly. 1998. Inflation crises and long-run growth. Journal of Monetary Economics 41(1): 3-26. Bruno, M. and Easterly, W. 1996. Inflation and growth: in search of a stable relationship. Federal Reserve Bank of St. Louis Review 78(3): 139-146. Easterly, William. 2001. The Elusive Quest for Growth. Cambridge, MA: MIT Press. Barro, R. J. 1997. Determinants of economic growth. Cambridge, Mass.: MIT Press. Andres, J. and I. Hernando. 1999. “Does Inflation harm Economic Growth? Evidence from the OECD.” in The Costs and Benefits of Price Stability, edited by M. Feldstein. Chicago: University of Chicago Press. Bolton, Daniel M. and Alexander, W. Robert J. 2001. The Differing Consequences of Low and High Rates of Inflation. Applied Economics Letters 8(6): 411-14. Fernandez Valdovinos, Carlos G. 2003. Inflation and Economic Growth in the Long Run. Economics Letters 80(2): 167-73.
  • 82.De Gregorio, Jose. 1993. Inflation, Taxation and Long-Run Growth. Journal of Monetary Economics 31: 271-98. Jones, L., R. E. Manuelli and P. E. Rossi. 1993. Optimal Taxation in Models of Endogenous Growth. Journal of Political Economy 101(3): 485-517. Feldstein, Martin. 1999. “Capital Income Taxes and the Benefit of Price Stability,” in The Costs and Benefits of Achieving Price Stability, edited by M. Feldstein. Chicago: Chicago University Press. Fischer, Stanley, 1993. The Role of Macroeconomic Factors in Growth Journal of Monetary Economics 32(3): 485-512.
  • 83. Boyd, John, Ross Levine, and Bruce Smith. 2001. The Impact of Inflation on Financial Sector Performance. Journal of Monetary Economics 47: 221-48. Braun, M., and R. Di Tella. 2004. Inflation, Inflation Variability, and Corruption. Economics and Politics 16(1): 77-100. Al-Marhubi, F. A. 2000. Corruption and Inflation. Economics Letters 66(2): 199-202.
  • 84. Easterly, W. and Stanley Fischer. 2001. Inflation and the Poor. Journal of Money, Credit, and Banking 1: 159-178. Datt, Gaurav and Martin Ravallion. 1998. Why Have Some Indian States Done Better Than Others at Reducing Rural Poverty? Economica 65: 17-38. Agenor, Pierre-Richard. 1999. “Stabilization Policies, Poverty, and the Labor Market,” in Poverty in sub-Saharan Africa, edited by E. Thorbecke. Ithaca, NY: Cornell University Press. Romer, C. and Romer, D. 1999. “Monetary Policy and the Well-Being of the Poor.” In Income Inequality: Issues and Policy Options. Kansas City: Federal Reserve Bank of Kansas City. Pg 159-201. Cardoso, Eliana. 1992. Inflation and Poverty. NBER Working Paper 4006. Powers, Elizabeth T. 1995. Inflation, Unemployment, and Poverty Revisited. Economic Review 3: 2-13. Li, Hongyi, and Heng-fu Zou. 2002. Inflation, Growth, and Income Distribution: A Cross-country Study. Annals of Economics and Finance 3(1): 85-101.Christiaensen, L., L. Demery, and S. Paternostro. 2003. Macro and Micro Perspectives of Growth and Poverty in Africa. The World Bank Economic Review 17: 317-334. World Bank. 2005. Pro-Poor Growth in the 1990s: Lessons and Insights from 14 Countries. Washington D.C.: World Bank. Lustig, Nora. 2000. Crises and the Poor: Socially Responsible Macroeconomics. Economía 1(1): 1-30.

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