A0513
Title: Lessons from the co-movement of inflation around the world
Authors: Danilo Cascaldi-Garcia - Federal Reserve Board (United States) [presenting]
Luca Guerrieri - Federal Reserve Board (United States)
Matteo Iacoviello - Federal Reserve Board (United States)
Michele Modugno - Federal Reserve Board (United States)
Abstract: The aftermath of the COVID-19 pandemic saw a synchronized surge in inflation around the world. However, the nature of this co-movement is ambiguous at least in three dimensions. First, whether the co-movement is driven by the trend component of inflation, or also by its cyclical part. Second, whether this co-movement is a phenomenon concerning sectors more exposed to the international markets' dynamics, or whether it percolates to other sectors. Third, what are the drivers of this co-movement. These ambiguities are resolved by looking at the behavior of core and noncore components of inflation across 20 different countries through the lenses of a rich model that divides each component into four elements: A common trend, a common cyclical component, an idiosyncratic trend, and an idiosyncratic cyclical component. It is found that the global component of inflation accounts for a large part of the variation in world inflation, including during the inflationary episodes of the energy crises of the 1970s-80s, as well as the post-COVID period. Moreover, the recent rise in global inflation is linked to both commodity-driven shocks and to global activity shocks such as the sharp decline and rebound in activity due to the COVID-19 pandemic and the associated labor market shortages.
