Sixty years of global inflation: a post-GFC update

Summary

Focus

The extent to which international factors shape the inflation process has significant bearing on formulating domestic policy and maintaining economic stability. If inflation is associated with global factors, domestic policy tools may have less impact in controlling it, particularly in smaller and more open economies where external influences can be particularly strong. In light of these considerations, to what extent has the recent inflation experience been a global phenomenon?

Contribution

We study the international synchronisation of inflation using data from 1960 to 2023. This allows us to look at inflation trends following significant global events like the Great Financial Crisis (GFC) and the recent post-pandemic inflation surge. Our approach builds on a dynamic factor model and examines common factors driving inflation rates across countries during different periods of globalisation. We examine how commodity prices, global value chains (GVCs), US monetary policy and US or Chinese inflation influence global inflation, underlining the interconnectedness of global economies.

Findings

Empirically, we find very strong evidence that inflation is synchronised globally. The first principal component of inflation, that is, the global inflation trend, explains a significant portion of variation in inflation. This is especially true in advanced economies and holds throughout various sub-periods in our sample. The component is associated with US interest rates, and US inflation often leads global inflation trends. Our analysis also reveals that global economic variables, such as the US Dollar Index, the US federal funds rate and commodity prices, correlate with the global inflation component, underscoring the impact of global trade and financial policies on inflation. We find some evidence that inflation in China is mildly associated with the second principal component of inflation. Last, we find evidence that GVCs affect the inflationary process, with countries that are more integrated into GVCs exhibiting a higher correlation with the global inflation component. These findings highlight the intricate ways in which global economic integration influences domestic inflation outcomes.

Abstract

Is inflation (still) a global phenomenon? We study the international co-movement of inflation based on a dynamic factor model and in a sample spanning up to 56 countries during the 1960-2023 period. Over the entire period, a first global factor explains approximately 58% of the variation in headline inflation across all countries and over 72% in OECD economies. The explanatory power of global inflation is equally high in a shorter sample spanning the time since 2000. Core inflation is also remarkably global, with 53% of its variation attributable to a first global factor. The explanatory power of a second global factor is lower, except for select emerging economies. Variables such as a broad dollar index, the US federal funds rate, and a measure of commodity prices positively correlate with the first global factor. This global factor is also correlated with US inflation during the 70s, 80s, the GFC, and COVID. However, it lags these variables during the post-COVID period. Country-level integration in global value chains accounts for a significant proportion of the share of both local headline and core inflation dynamics explained by global factors.

JEL classification: E31, E52, E58, F02, F41, F42, F14, F62

Keywords: globalisation, inflation, Phillips curve, monetary policy, global value chain, international inflation synchronisation