Global Inflation Dynamics and Inflation Expectations

In this paper we investigate dynamics of global inflation and short-run inflation
expectations. We estimate a global vector autoregressive (GVAR) model estimated
using Bayesian techniques. We then explore the effect of three source of inflationary
pressure that could drive up inflation expectations: domestic aggregate demand and
supply shocks as well as a global increase in oil price inflation. Our results indicate that
inflation expectations tend to increase as inflation accelerates. However, the effects of
the demand and supply shock are for most countries only short-lived. If domestic
inflation accelerates due to a global acceleration of oil price inflation, however, effects
are generally more pronounced and long-lasting. This implies that to assess the link
between actual inflation and inflation expectations appropriately, it is important to
disentangle the underlying sources of inflationary pressure. We also examine whether
the relationship between actual inflation and inflation expectations has changed since
the global financial crisis. We find that the transmission between inflation and inflation
expectations was largely unaffected in response to domestic demand and supply
shocks, while effects of an oil price shock on inflation expectations are smaller postcrisis.