The International Dimension of Inflation: Evidence from Disaggregated Consumer Price Data


  • Prepared for the JMCB-Fed Board Conference “Domestic Prices in an Integrated World Economy,” Washington, DC, September 27–28 2007. We thank Alessandro Notarpietro for his excellent research assistance. We thank Christian Broda, Mario J. Crucini, Ken West, and two anonymous referees for useful comments on an earlier draft. We are grateful to Benoit Mojon for providing the price data for France, and to Domenico Giannone and Roman Liska for useful discussions and insights.


We estimate the contribution of international common factors to the dynamics of price inflation rates of a cross-section of 948 CPI products in four OECD countries: United States, Germany, France, and United Kingdom. We find two main results. First, on average, and at least in the sample 1991–2004, one international common factor explains between 15% and 30% of the variance of consumer prices (depending on the transformation applied to the data). Given the high level of disaggregation of our panel, this estimate is best viewed as a lower bound for the contribution of international factors to inflation dynamics. Second, we find a strongly positive and statistically significant relationship between exposure of consumer inflation to international shocks and trade openness at the sectoral level. The latter result holds regardless of whether the original data are expressed in local as opposed to common currency.