Inflation Dynamics in a Fragmented Recovery: Evidence from IsDB Member Countries

1.    Introduction

Since 2020, the global economy has been grappling with overlapping crises, reversing gains in poverty alleviation and macroeconomic stability. In particular, the 2022 surge in food and energy prices, triggered by the conflict in Eastern Europe, intensified inflationary pressures worldwide. Despite signs of monetary easing amid heightened policy uncertainty, consumer prices remain elevated in many IsDB Member Countries, fueling risks of macroeconomic instability and social unrest. This paper aims to identify the macroeconomic and structural drivers behind these inflation dynamics and offer actionable policy recommendations for IsDB member countries.

2.    Regional inflation patterns across IsDB member countries

Inflation in IsDB member countries has consistently been above the world and Emerging Market and Developing Economies (EMDEs) averages, with the gap widening significantly during global shock episodes (Figure 1). For instance, in the wake of the COVID-19 pandemic and the subsequent east European crisis, inflation surged across all regions but reached significantly higher levels in IsDB member countries, peaking at nearly 17%, more than twice the peak recorded in advanced economies.

Figure 1: Inflation, average consumer prices (% change)

From a regional perspective, the inflationary surge in recent years is mainly driven by member countries in Asia, Latin America, and Europe (ALAE). In this grouping, average inflation peaked at 23% in 2022 and remained elevated (Figure 2). This sharp increase partly reflects spillovers from the east European conflict, particularly in energy and food markets, but more critically stems from domestic macroeconomic imbalances and recurrent currency pressures in large economies such as Türkiye and Iran.

For member countries in Sub-Saharan Africa (SSA), inflation nearly tripled from 7.9% in 2019 to about 20.4% in 2024. This is mainly driven by price increases in Nigeria, the largest economy in the region. Nigeria’s annual inflation rate surged from 11.4% in 2019 to 33.2% in 2024 on account of currency depreciations and supply disruptions. The consumer price index also rose sharply in some West African countries outside the common currency area, with inflation at double digit for Sierra Leone (28.4 %) and Gambia (11.6%) in 2024.

Inflation in the Middle East and North Africa (MENA) region has remained relatively contained, though it has edged higher in recent years driven primarily by conflict-related supply disruptions. For instance, inflation in Sudan averaged nearly 185% over the past five years. In contrast, member countries within the Gulf Cooperation Council (GCC) have managed to anchor inflation below 3% on average, reflecting robust monetary–fiscal coordination, currency pegs to the US dollar, and sizable external buffers.

Figure 2: Inflation (%), Recent Trends Across IsDB Regions

3.    Structural and institutional factors behind the inflation patterns

Food-price inflation has been a central driver of headline inflation in many member countries, as food typically represents a large share of consumption baskets in low-income and fragile economies. Inflation differentials also reflect a complex interplay of institutional and macroeconomic factors, including the exchange rate regime.

The exchange rate regime

Exchange-rate pass-through (ERPT) has emerged as a dominant transmission channel of inflation across many developing economies. Empirical evidence shows that ERPT tends to be higher and faster in high-inflation environments and where imports are large and priced in dominant currencies. This relationship is visible across several high-inflation IsDB member countries that have experienced sharp exchange rate depreciations in recent years.

Overall, a significant correlation is found between currency depreciation (measured by the deviation of the 2024 average exchange rate per US$ from previous 10-year average) and the annual inflation rate of member countries. The correlation coefficient measured for a sample of 55 member countries is 0.93, suggesting a strong and positive relationship between the two indicators (Figure 3).

Figure 3: Currency depreciation and Inflation

The stability of the exchange rate largely depends on the institutional arrangement underpinning the monetary policy. Table 1 summarizes member countries’ exchange rate regime classifications, grouped into three broad categories.

• Pegged regimes, including currency boards and conventional pegs, represent the most rigid arrangements. In these systems, central banks commit to maintaining a fixed exchange rate with a foreign anchor currency, often backed by high levels of foreign reserves and strong institutional safeguards.
• Intermediary exchange rate regimes include stabilized arrangements, where no formal peg exists but the central bank intervenes actively to limit exchange-rate fluctuations, crawl-like arrangements, in which the exchange rate is adjusted periodically in small steps, and other managed arrangements.
• Floating exchange rate regimes allowthe exchange rate to be determined by market forces. While flexible exchange rates can act as automatic stabilizers during external shocks, they also pose risks of high volatility and overshooting, especially in shallow markets with limited hedging instruments.

Table 2 illustrates some key features of the inflation patterns across IsDB member countries based on their exchange rate regime. Pegged regimes present significantly lower inflation rates, averaging about 3.3% during 2020-2024. Inflation rates appear more homogeneous within this group of countries, based on a median value of 3.3% and a standard deviation of 1.7. By contrast, managed arrangements exhibit the widest inflation dispersion. Average inflation in this group is 25.8%, but with a large standard deviation of 15.3, ranging from as low as 1.1% to as high as 184.8%.  On the other hand, floating regimes recorded moderate inflation outcomes, with an average of 3.8% and a median of 5.4%, but a relatively higher standard deviation (7.1) than pegged systems.

Income level and fragility

Table 3 presents inflation patterns across IsDB member countries, highlighting the fragility and income dimensions. While average inflation is nearly identical between LDMCs (13.7%) and non-LDMCs (13.8%), MCs in Fragile and Conflict-Affected Situations (FCS) exhibit the highest inflation average (20.7%), with a significant standard deviation of 50.3, pointing to extreme disparities and hyperinflation cases (e.g., Sudan at 184.8%). Median inflation is much lower than the average in all groups. This indicates that a small number of countries with hyperinflation are skewing the average upward.

Conclusions and recommendations

The findings of the analysis suggest that intermediate exchange rate regimes are largely subject to monetary instability where the institutional conditions for credibility and sustainability are not fully met.  In contrast, more rigid arrangements, such as conventional pegs and currency boards, provide a solid anchor for monetary policy and can promote monetary stability even in some low-income economies or countries in fragile and conflict-affected situations.

However, inflation heterogeneity across countries sharing the same regime highlights the importance of broader macroeconomic coherence and institutional robustness. To ease persistent food-price pressures, countries should scale up investment in climate-resilient agriculture, storage infrastructure, rural logistics, and digital market platforms. Stronger regional food corridors can also reduce exposure to global prices and supply disruptions. In countries where food and energy dominate household spending, well-targeted social protection instruments are indispensable. These may include cash transfers, school feeding schemes, and subsidy reforms.