Inflation Dynamics: Expectations, Structural Breaks and Global Factors

There is no consensus over the importance of “global forces” on inflation. This study
explores the role of structural breaks in the inflation process, and their timing, whether it
is common across countries, and the extent to which ‘global forces’ are relevant. Three
conclusions stand out. Global inflation impacts inflation in both AE and EME, but the
impact is more heterogeneous than existing narratives have argued. One’s interpretation
of global influences on domestic inflation differs, according to whether poorly performing
economies in inflation terms are considered as opposed to the standard practice of
examining mean inflation performance. A focus on observed inflation alone ignores that
inflation expectations, including a global version of this variable, also plays a critical in
inflation dynamics. Finally, there are significant spillovers in inflation between AE and
EME, but these too are sensitive according to relative inflation performance. Some policy
implications are also drawn.