The globalisation of inflation in the European emerging countries

BIS Working Papers  |  No 915  | 
22 December 2020



The paper aims to assess the level of integration of the European emerging countries in the global economy by analysing inflation dynamics across the region. Starting in 2014, the inflation rate in the European emerging countries declined consistently, in line with global developments, even if strong economic growth and tight labour markets in the region would have been expected to fuel local inflationary pressures.


The paper contributes to the literature on inflation globalisation by focusing on the European emerging countries. Given the high complexity of the globalisation process, the study considers both the short- and the longer-term implications, and covers different measures of price changes in the economy.


The results show that global factors, such as the euro area inflation rate and the output gap in the euro area, guided the inflation rate in the European emerging countries below the levels warranted by local fundamentals. Consumer prices and industry producer costs are strongly synchronised with global factors. However, price changes in the service sector and those of the less volatile items in the household consumption basket posted lower correlation with international developments.


This paper studies inflation globalisation in the European emerging countries by measuring inflation co-movement across the region and assessing how local inflation rates reacted to global factors. The analysis covers central and eastern European countries which are members of the European Union but do not currently belong to the euro area. The results confirm sizeable inflation co-movement and a significant influence exerted by global factors on the inflation rate in emerging Europe. The euro area inflation rate and the output gap in the euro area are the external factors with the strongest impact, thereby underlining the strong ties of the region with the single currency area. The sensitivity of the consumer price (CPI) inflation rate in the region to global price dynamics firmly increased after 2014, whereas the alignment of producer price inflation with international inflation developments occurred even earlier, after the global financial crisis. Nevertheless, core CPI inflation and GDP deflator inflation were less correlated with the corresponding global inflation indicators, emphasising the still prominent role of domestic factors in driving price changes in the region.

JEL Codes: E31, F41, F62

Keywords: inflation, globalisation, emerging countries