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Low Inflation in Advanced Economies: Facts and Drivers

Author

Listed:
  • Sanjana Bhatnagar
  • Anne-Katherine Cormier
  • Kristina Hess
  • Patrisha de Leon-Manlagnit
  • Elise Martin
  • Vikram Rai
  • Renaud St-Cyr
  • Subrata Sarker

Abstract

Since the global financial crisis, core inflation has been persistently below target in most advanced economies. Recently, it has weakened further in several advanced economies despite gradually diminishing slack. This note reviews recent developments in core inflation across advanced economies and identifies distinctive patterns across regions. In many advanced economies outside of the United States, the decrease in core inflation started in 2016 and was driven primarily by goods prices—most likely because of lower export prices from China in 2016 and past exchange rate appreciations. In the United States, however, the decline in core inflation began in 2017 and has been driven mostly by service prices rather than goods prices. We estimate that roughly two-thirds of the softening in US core inflation may be due to idiosyncratic factors that are unlikely to persist, while the remaining one-third may be attributable to more persistent factors. We then examine the extent to which the persistent weakness in inflation after the global financial crisis can be explained by common factors across advanced economies. Our results suggest that global factors do not play much of a role in influencing domestic core inflation dynamics but that they remain important determinants of total inflation, acting mainly through the goods inflation channel—particularly through energy prices. Finally, we briefly investigate the relationship between economic slack and inflation. We find that the relationship between the output gap and core inflation remains positive, albeit modest, in advanced economies and that a significant share of the post-crisis weakness in inflation has been driven by domestic economic slack. In addition, we find that the relationship between the output gap and inflation is more evident with core services inflation than core goods inflation.

Suggested Citation

  • Sanjana Bhatnagar & Anne-Katherine Cormier & Kristina Hess & Patrisha de Leon-Manlagnit & Elise Martin & Vikram Rai & Renaud St-Cyr & Subrata Sarker, 2017. "Low Inflation in Advanced Economies: Facts and Drivers," Staff Analytical Notes 17-16, Bank of Canada.
  • Handle: RePEc:bca:bocsan:17-16
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    References listed on IDEAS

    as
    1. Olivier Blanchard & Eugenio Cerutti & Lawrence Summers, 2015. "Inflation and Activity – Two Explorations and their Monetary Policy Implications," NBER Working Papers 21726, National Bureau of Economic Research, Inc.
    2. Dany Brouillette & James Ketcheson & Olena Kostyshyna & Jonathan Lachaine, 2017. "Wage Growth in Canada and the United States: Factors Behind Recent Weakness," Staff Analytical Notes 17-8, Bank of Canada.
    3. Mr. Yasser Abdih & Mr. Ravi Balakrishnan & Baoping Shang, 2016. "What is Keeping U.S. Core Inflation Low: Insights from a Bottom-Up Approach," IMF Working Papers 2016/124, International Monetary Fund.
    4. Olivier Blanchard, 2016. "The Phillips Curve: Back to the '60s?," American Economic Review, American Economic Association, vol. 106(5), pages 31-34, May.
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    Cited by:

    1. Feldkircher, Martin & Siklos, Pierre L., 2019. "Global inflation dynamics and inflation expectations," International Review of Economics & Finance, Elsevier, vol. 64(C), pages 217-241.
    2. Lei Lv & Zhixin Liu & Yingying Xu, 2019. "Technological progress, globalization and low-inflation: Evidence from the United States," PLOS ONE, Public Library of Science, vol. 14(4), pages 1-19, April.
    3. Oleksiy Kryvtsov & James MacGee, 2020. "Has the Inflation Process Changed? Selective Review of Recent Research on Inflation Dynamics," Discussion Papers 2020-11, Bank of Canada.

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    More about this item

    Keywords

    Inflation and prices; International topics;

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F0 - International Economics - - General

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