Disinflation in the 1990s: The experience of the industrialized world

Canada has not been alone in making substantial progress towards price stability. Average inflation in the industrialized countries fell markedly in the first half of the 1990s, the third such episode of broad-based disinflation in the last 20 years. By the latter part of 1994, inflation in many countries had fallen to rates that had not been sustained since the early 1960s, generally converging to within a range of 1 to 3 per cent. Despite the decline in inflation to similar low levels, there were a number of interesting developments across the industrialized countries. For example, the pace of disinflation slowed noticeably after 1992 despite continued weak demand conditions. Inflation in countries that experienced a sharp depreciation in their exchange rates in the first half of the 1990s was, on average, no higher than elsewhere. The author identifies various factors affecting inflation outcomes in the industrialized countries. These include special factors, such as changes to indirect taxes, as well as more fundamental determinants of inflation, including the degree of economic slack. The presence of these factors, and perhaps the way in which inflation responded to them, varied across countries. One common element, however, was an increased commitment by monetary authorities across the industrialized economies to the goal of achieving and maintaining price stability.