Whose Inflation Is It Anyway? Inflation Spillovers Between the Euro Area and Small Open Economies

For the last two years, inflation has been steadily falling across the countries of the European Union, generating mounting deflationary pressures. Recent studies suggest that apart from the global determinants influencing broad inflation measures (e.g., plummeting commodity prices), core inflation components are subject to the rising influence of globalization. Our analysis focuses on two aspects: the percentage of Harmonised Index of Consumer Prices (HICP) components affected by deflation, and the spillovers of headline, core, non-energy goods and services inflation between the euro area and selected small open economies. In order to address the issue of inflation broadness, we calculate the percentages of HICP components whose annual growth rates fall into certain ranges and introduce a simple measure, the discrepancy index, to show the relative strength of deflationary and inflationary groups. To address the problem of quantifying inflation spillovers across the selected economies, we use the Diebold and Yilmaz spillover indices. The results indicate that the share of deflationary groups for most countries has been consistently rising since 2010, with the discrepancy index approximating its all-time lows in the fourth quarter of 2014. Simultaneously we show that the spillover index for non-energy industrial goods and services inflation has recently risen considerably, with the measure for headline inflation remaining elevated and the one for core inflation dropping. The euro area remains a net inflation transmitter in most cases.