Global common factors and the cross-country heterogeneity of inflation

This paper examines how cross-country differences in inflation can be explained by heterogeneous exposure to common global shocks. Using monthly CPI data for 181 countries and regions from 1990 to 2022, we analyze inflation heterogeneity from a relative perspective by focusing on excess inflation, defined as domestic inflation net of global inflation. We estimate a factor-based model that characterizes countries’ exposure of their excess inflation to global business-cycle conditions, commodity price movements, and global uncertainty. Despite facing common global shocks, countries exhibit substantial cross-country variation in their inflation exposure. This variation explains a significant share of differences in average excess inflation across economies. In particular, countries whose excess inflation is more procyclical with respect to the global business cycle tend to exhibit higher average relative inflation than countries with countercyclical inflation patterns. These findings are robust across alternative specifications and subsamples.