Is Higher Inflation More Variable? Evidence from 151 Economies, 1996–2025, a Regime-Mixture Proof That the Link Can Arise Without Causation, and an Exact Split into Shock Size and Persistence
Year: 2026
Type: preprint
Abstract: Friedman argued in his Nobel lecture that high inflation tends to be variable inflation. Using World Bank annual CPI inflation for 151 economies with at least 28 observations in 1996–2025, I find that the rank correlation between a country's mean inflation and its standard deviation is 0.857, and that the log standard deviation rises one for one with the log mean (slope 0.9954, se 0.0749; 0.7387 among countries with mean inflation of 10% or less). I prove two results that sharpen the interpretation. First, by the law of total variance, a country that spends a share p of years in a high-inflation regime has a mean that rises by pΔ and a between-regime standard deviation of Δ√(p(1−p)), so a cross-country link appears even if inflation in each regime is equally predictable. Second, for a stationary AR(1), ln sd = ln σₑ − ½ ln(1−ρ²), and OLS linearity splits the cross-country slope exactly: 0.8386 comes from larger shocks, 0.0456 from persistence and 0.1113 from the small-sample remainder. Within countries, the absolute AR(1) forecast error next year rises by 0.2115 points per point of current inflation (cluster se 0.0360). India's CPI inflation averaged 6.29% with a standard deviation of 2.78; in 2016–2025 the mean was 4.74% and the standard deviation 1.40, the lowest of its three decades.
Author: Aguru, Manoj Kumar
Institution: Chaitanya
Language: English
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W7224480208