Philip R Lane: International inflation co-movements

Speech by Mr Philip R Lane, Member of the Executive Board of the European Central Bank, at the Inflation: Drivers and Dynamics 2020 Online Conference, Federal Reserve Bank of Cleveland/European Central Bank, 22 May 2020.

The views expressed in this speech are those of the speaker and not the view of the BIS.

In my remarks today, I will discuss some analytical issues in understanding the drivers of international inflation co-movements. In particular, I will examine the individual contributions of common shocks, structural change and the evolution of monetary policy regimes to the observed high correlation of inflation across countries. At the same time, I will caution that correlated inflation paths are not inevitable. Some underlying forces may contribute to divergent inflation outcomes in the years to come.

International inflation patterns

As illustrated in Chart 1, average rates of inflation have generally declined and exhibited lower volatility in recent decades, most notably in advanced economies. A common component accounts for a large share of the remaining variability of national inflation rates: this finding has been confirmed for advanced economies in a range of studies.