Why Do Inflation Rates Vary Across Countries?

I build an APT-like factor model for consumer price fluctuations across 181 countries and regions from January 1990 to February 2022. The sizeable cross-sectional heterogeneity in inflation is well explained by the differential exposures to a set of global factors. It includes three procyclical factors, i.e., energy price, agriculture price, and composite leading indicators, and three countercyclical factors, i.e., the global unemployment rate, precious metals price, and world uncertainty. The empirical estimates are significant and robust to various model specifications, different rolling-window analyses, and additional global factors, revealing that economies with procyclical inflation generally have higher inflation than economies with countercyclical inflation. Furthermore, the comparisons with cross-sectional asset pricing theory are interesting: despite the divergent rationale, factor prices have the same sign, i.e., factor prices for procyclical factors are positive, while for countercyclical factors are negative