In the aftermath of the pandemic, inflation surged across various sectors in the U.S., mirroring trends seen in advanced economies globally. The decline from this inflation peak has also been widespread, emphasising a shared trajectory of inflation patterns internationally. Our exploration uses the Multivariate Core Trend (MCT) Inflation model to dissect inflationary forces, revealing that global trends significantly influence the persistence of consumer price index (CPI) inflation both in the U.S. and abroad, spanning both pre- and post-pandemic epochs.
Applying our Global MCT model, we analysed inflation data across a selection of seven countries— the U.S., UK, Euro Area, Canada, Japan, South Korea, and Mexico. This model disaggregates inflation rates by sector, capturing the essence of core goods, non-housing core services, housing, and food and energy. It distinguishes between transitory and persistent components of inflation, integrating global and domestic factors along with specific country-based influences.
The analysis identifies three pivotal common factors affecting inflation: a global factor that impacts all sectors (Global Inflation Trend, or GIT), alongside two sectoral influences targeting core goods (Core Goods Global Inflation Trend, or CG-GIT) and food and energy sectors (Food and Energy Global Inflation Trend, or FE-GIT). Remarkably, these global influences account for up to 90% of CPI inflation persistence in most advanced economies, most notably, excluding Japan. Thus, the persistent inflation seeming to emerge is largely a function of shared global factors.
Diving deeper into sector-specific inflation, we established a distinct role for each global trend. Noteworthy is that non-housing core services inflation is heavily influenced by GIT, while core goods and food and energy inflation trends are shaped by the additional CG-GIT and FE-GIT factors. This interplay demonstrates the interconnectedness of global inflation, transcending national borders. The ongoing international supply chain dynamics particularly underscore this integration in core goods.
Focusing specifically on U.S. inflation post-pandemic, data from December 2019 onwards highlights a diminished role for U.S.-specific factors, implying most trends are transient. The overall persistence in U.S. core goods inflation is driven chiefly by CG-GIT, showcasing the impact of global supply chain disruptions. Other sectors present mixed signals, with the rise in housing inflation tied to common sectoral factors, signalling widespread trends post-2022, likely amidst rising rents and energy prices.
Post-pandemic U.S. inflation reflects significant global trends shared across advanced economies, characterised by a strong correlation among sectoral inflation rates. The Global MCT model dissects these influences, highlighting the dominance of shared trends in determining CPI persistence. Notable findings include the importance of global and sector-specific factors, particularly evident in the context of supply chain disruptions. These observations invite deeper exploration into the origins of these global inflationary dynamics.
In essence, this analysis underscores that once we filter out transient fluctuations, international inflation rates reveal a striking mutuality. The slow-moving inflation trends observed are not isolated phenomena; they resonate across nations driven by global forces. Three overarching global trends elucidate the majority of variations in inflation persistence, stimulating further inquiry into the causes behind these trends.
Original Source: libertystreeteconomics.newyorkfed.org
