We introduce a model to estimate inflation at the global level and its contribution across countries. Our model is based on Almuzara et al. (2024) NY Fed note “Is the Recent Inflationary Spike a Global Phenomenon?”. We estimate the trend of both global core and global headline CPI at 3% right now. For core inflation, both the common component and the country-specific component have moderated but remain significantly higher than pre-Covid. In most countries, the trend of core CPI remains above target, and in some countries (U.K., U.S., France, somehow Germany, Canada, and Japan) the country-specific trend is either above target or higher (and trending higher) than pre-Covid. Notable exceptions are Denmark, Norway, and South-Korea in which the country-specific trend is lower than pre-Covid.
Going forward, we will maintain this model and run it once a month. Please, reach out to us in case you would like to discuss more details or have ad-hoc requests.
What the model does
The model estimates a measure of “global inflation trend” (for both core and headline CPI) and decomposes this trend into a “common” component across countries, and a “country-specific” component. Both measures can be used to assess the persistency of the inflationary process at the global level and in each country.
Details. The approach builds on Stock and Watson (2016) “Core Inflation and Trend Inflation”, and on the NY Fed Multivariate Core Trend Inflation model. Specifically, we model the monthly inflation rate of 18 countries as the sum of a persistent and a transitory component. Both persistent and transitory components are further decomposed into common and country-specific subcomponents. Global trend inflation is defined as the aggregate of the persistent components (both common and country-specific) of the different countries, each weighted by their respective share of personal consumption expenditures.
List of countries included
The model includes 18 developed countries: The Netherlands, the U.K., Spain, Sweden, Denmark, Italy, Norway, France, Belgium, Switzerland, Germany, Canada, Japan, Portugal, South Korea, the U.S., Austria, and Ireland.
Results
We estimate that in May global core CPI inflation printed at 2.5% MoM saar (Figure 1), a bit below the average of the last 6 months. We also estimate the trend of global core CPI at 3.2% in May, of which 1.0% from a common factor across countries, and 2.2% coming from country-specific factors (Figure 2). The takeaway is clear: global core CPI inflation has moderated but remains more consistent with 3% than 2% right now. The run-up in core CPI across countries has been the result of common shocks such as global supply chain issues (which used to be close to zero before Covid) but also of country-specific shocks (i.e. fiscal policy) which account for about 1/3 of the runup of core inflation in 2022.
Figure 1. Global core CPI (MoM saar) and its trend
Note: the figure shows the estimated global core CPI MoM saar (black dotted line), and its trend (solid blue line and bands).
Figure 2. Global core CPI trend and its contributions: common vs country-specific components
Note: the figure shows the estimated trend of global core CPI (black line) together with its contributions: the common component across countries (yellow line) and the country-specific component (blue line).
Results at the country-level
The model can be used to assess trend inflation in each country. Figure 3 shows core CPI MoM saar (the black dashed line) for the U.K. (reminder: the data are SA in-house), together with its trend (the blue line). The third line in Figure 3 (the red line) shows the estimated country-specific trend. Therefore, the difference between the blue line and the red line is the contribution of the common trend across countries to the UK core CPI trend. The takeaway is that according to the model, (i) core CPI trend in the U.K. is still above 4%, and (ii) even assuming that the contribution of the (cross-country) common component will be lower going forward, the U.K. country-specific trend has increased notably and it is now above 3% (put it simply: hard to see core CPI in the U.K. going back to target, even assuming that everything else will normalize in the world, as the country-specific trend is now well above target).
Figure 3. Core CPI inflation in the U.K., its trend and contributions
Note: the figure shows the MoM saar of core CPI in the U.K. (black dashed line), and the estimated trend (blue line). The data are seasonally-adjusted in-house. The red line shows the U.K. country-specific trend, that is the trend of core CPI in the UK net of shocks common to the other countries. The flat line indicates the 2% target.
What about the other 17 countries?
Because the model includes 18 countries, we cannot discuss the results for each of them. However, we have prepared a PPT showing the results country by country. The reader can download it here. The main result is that in most countries the trend of core CPI remains above target, and in some countries (U.K., U.S., France, somehow Germany, Canada, Japan) the country-specific trend is either above target or higher (and trending higher) than pre-Covid. Notable exceptions are Denmark, Norway, and South-Korea in which the country-specific trend is lower than pre-Covid.
What about headline CPI?
According to the model, the trend of global headline CPI is around 3%, with similar contributions from the common component and the country-specific component (Figure 4). In this case, unsurprisingly, the model suggests that most of the runup in 2022 was due to common factors (i.e. energy prices). Results for individual countries are available in the PPT.
Figure 4. Global headline CPI trend and its contributions: common vs country-specific components
Note: the figure shows the estimated trend of global headline CPI (black line) together with its contributions: the common component across countries (yellow line) and the country-specific component (blue line).
Conclusion
We will maintain this model going forward, as it helps assessing inflationary pressures both at the global level and in each country. Right now, the model suggests that inflation has moderated everywhere, although it remains hard to see core at target going forward.