Speech by Ms Isabel Schnabel, Member of the Executive Board of the European Central Bank, at a conference organised by the Österreichische Vereinigung für Finanzanalyse und Asset Management, Vienna, 11 May 2022.
There are two competing views on the impact of globalisation on domestic inflation.
One view is that the global component of inflation by and large reflects price swings in energy and commodity markets.1 Globalisation may affect underlying inflation, but these effects are judged to be economically small.
The alternative view is that global economic slack matters for domestic underlying inflation and that globalisation may have lowered the sensitivity of inflation to domestic slack, that is the slope of the Phillips curve.
Although the strength of such global factors may differ across economies, a failure to properly account for them may result in significant forecasting errors. This is the “globalisation of inflation” hypothesis.
In my remarks today, I will argue that the pandemic, and more recently Russia’s invasion of Ukraine, are providing tangible evidence in favour of the second hypothesis.
The full speech is available at https://www.bis.org/review/r220513b.htm