Prices without borders

Low inflation is a global phenomenon with global causes

ECONOMIC MODELS say that less slack in an economy leads to more inflation. But what defines an economy’s borders? As inflation-targeting took off in the 1990s, globalisation also accelerated. Trade grew from 39% of world GDP in 1990 to 51% at the turn of the millennium, cross-border finance was liberalised and the internet slashed the cost of communicating. In the 2000s policymakers began to wonder whether integrated markets had made inflation a global process. Economists generally pooh-poohed the idea. But with central bankers searching for explanations for today’s low inflation, the idea that global forces might be at work has come back into fashion. It has also become more relevant. If globalisation has held down inflation, might its reversal—thanks to the trade war and Brexit—send it shooting back up?

Inflation has been getting more synchronised across borders. On average, a common global trend accounts for nearly a quarter of the variation in national inflation rates since 2001, according to Jongrim Ha, Ayhan Kose and Franziska Ohnsorge of the World Bank. Add in factors specific to advanced economies and emerging markets, respectively, and trends spanning borders account for more than half the movement in inflation in the rich world and nearly a third of it in poorer countries.

This partly reflects simultaneous trends in monetary policy. But it may also indicate a growing role for global factors. Kristin Forbes of MIT, formerly a Bank of England rate-…