Global Inflation

This paper shows that inflation in industrialized countries is largely a global phenomenon. First, inflations of 22 OECD countries have a common factor that accounts for nearly 70% of their variance. This comovement is due not only to the trend components of inflation (up from 1960 to 1980 and down thereafter) but also to fluctuations at business cycle frequencies. Second, there is a robust error correction mechanism that brings national inflation rates back to global inflation. A simple model that accounts for this feature consistently beats standard benchmarks in forecasting inflation four to eight quarters ahead across samples and countries. © 2010 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.