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Global Inflation, Regional Factors

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Abstract

This paper shows that global inflation dynamics have a sizable regional component. Using a balanced panel of 61 countries that starts in 1970, we document that while the global factor, defined as the dominant principal component, explains a large portion of inflation variation in advanced economies, a model with only one principal component is less successful for developing countries. By contrast, a hierarchical dynamic factor model, which includes a global (unconstrained) factor and regional (restricted) factors, performs substantially better for emerging market and developing economies. The regional factors are linked to commodity prices and help improve the accuracy of inflation forecasts at the country level. Employing an unsupervised machine-learning technique, we show that the estimated clusters of countries, grouped according to similarities in inflation dynamics, exhibit a strong regional pattern. Our findings suggest that policymakers in developing countries should pay close attention to inflation dynamics in their neighboring countries.

Suggested Citation

  • Viacheslav Sheremirov & Hillary Stein, 2025. "Global Inflation, Regional Factors," Working Papers 25-6, Federal Reserve Bank of Boston.
    • Handle: RePEc:fip:fedbwp:101461
    DOI: 10.29412/res.wp.2025.06
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    References listed on IDEAS

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    1. Emanuel Moench & Serena Ng, 2011. "A hierarchical factor analysis of U.S. housing market dynamics," Econometrics Journal, Royal Economic Society, vol. 14(1), pages 1-24, February.
    2. Stein, Hillary, 2025. "Got milk? The effect of export price shocks on exchange rates," Journal of International Economics, Elsevier, vol. 155(C).
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    Keywords

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    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F6 - International Economics - - Economic Impacts of Globalization

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