thesis statement about the inflation

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Thesis Statement about Inflation

1 Background of the study

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2 Problem of the statement

3. objectives of the study.

To determine the major cause of inflation in Ghana.
To examine any long-run relationship between inflation and economic growth in Ghana.
To examine any short-run relationship between inflation and economic growth in Ghana.
To determine the threshold level of inflation that hurts economic growth in Ghana.

4 Hypothesis

HA4: There is no causal relationship between inflation and exchange rate, interest rate, government spending, and economic growth.
HA1: There is no significant long-run relationship between inflation and economic growth in Ghana.
HA2: There is no significant short-run relationship between inflation and economic growth in Ghana.
HA3: There is no threshold level beyond which inflation hurts economic growth in Ghana.

5 Significance of the Study

6 scope and limitations of the study, 7 methodology, 8 organisation of the study.

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Home — Essay Samples — Economics — Political Economy — Inflation

Essays on Inflation

Inflation essay topics and outline examples, essay title 1: understanding inflation: causes, effects, and economic policy responses.

Thesis Statement: This essay provides a comprehensive analysis of inflation, exploring its root causes, the economic and societal effects it generates, and the various policy measures employed by governments and central banks to manage and mitigate inflationary pressures.

Introduction
Defining Inflation: Concept and Measurement
Causes of Inflation: Demand-Pull, Cost-Push, and Monetary Factors
Effects of Inflation on Individuals, Businesses, and the Economy
Inflationary Policies: Central Bank Actions and Government Interventions
Case Studies: Historical Inflationary Periods and Their Consequences
Challenges in Inflation Management: Balancing Growth and Price Stability

Essay Title 2: Inflation and Its Impact on Consumer Purchasing Power: A Closer Look at the Cost of Living

Thesis Statement: This essay focuses on the effects of inflation on consumer purchasing power, analyzing how rising prices affect the cost of living, household budgets, and the strategies individuals employ to cope with inflation-induced challenges.

Inflation's Impact on Prices: Understanding the Cost of Living Index
Consumer Behavior and Inflation: Adjustments in Spending Patterns
Income Inequality and Inflation: Examining Disparities in Financial Resilience
Financial Planning Strategies: Savings, Investments, and Inflation Hedges
Government Interventions: Indexation, Wage Controls, and Social Programs
The Global Perspective: Inflation in Different Economies and Regions

Essay Title 3: Hyperinflation and Economic Crises: Case Studies and Lessons from History

Thesis Statement: This essay explores hyperinflation as an extreme form of inflation, examines historical case studies of hyperinflationary crises, and draws lessons on the devastating economic and social consequences that result from unchecked inflationary pressures.

Defining Hyperinflation: Thresholds and Characteristics
Case Study 1: Weimar Republic (Germany) and the Hyperinflation of 1923
Case Study 2: Zimbabwe's Hyperinflationary Collapse in the Late 2000s
Impact on Society: Currency Devaluation, Poverty, and Social Unrest
Responses and Recovery: Stabilizing Currencies and Rebuilding Economies
Preventative Measures: Policies to Avoid Hyperinflationary Crises

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Iflation and Its Causes

Methods to control inflation, the grade inflation, inflation: a deceitful solution to debt, let us write you an essay from scratch.

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How to Control Inflation in Pakistan

Main factors of inflation in singapore, effects of inflation on commercial banks’ lending: a case of kenya commercial bank limited, food inflation in the republic of india, get a personalized essay in under 3 hours.

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The Issue of Unemployment and Inflation in Colombia

The theory and policy of macroeconomics on inflation rate, socio-economic conditions in 'what is poverty' by jo goodwin parker, non-accelerating inflation rate of unemployment (nairu), targeting zero inflation and increase of government spending as a way of curbing recession, howa spiraling inflation has impacted the venezuelan economy, how venezuela has been affected by inflation, effects of inflation on kenya commercial banks lending, exploring theories of inflation in economics, about fuel prices: factors, impacts, and solutions, analyzing the inflation reduction act, the oscillating tides of the american economy, exploring the implications of the inflation reduction act, inflation reduction act in the frame of macroeconomic challenges, the impact of inflation reduction act on the international economic stage, relevant topics.

Unemployment
Penny Debate
Supply and Demand
American Dream
Real Estate
Minimum Wage

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Inflation Essay Examples and Topics

Keynesian theory of unemployment, inflation: types and negative effects, increasing inflation impact on individuals, history of the kenyan economy: stimulating the economic growth through various means, inflation and deflation and their outcomes, inflation in the united kingdom.

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Inflation in Turkey: Contemporary and Past Episodes

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The “Analyze This! Inflation” Video Reflection

The price deviations and inflation rates, the economic disparity and inflation, the inflation dynamics in the canadian context.

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“Expected and Realized Inflation…” by Binder & Kamdar

Inflation at the international monetary fund, “inflation hits the fastest pace since 1981, at 8.5% through march” by koeze.

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Inflation Rates and the Value of the Dollar

Monetary union of latin american countries.

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Inflation’s Impact on Fixed Income

Unemployment and inflation relation, unanticipated and participated inflation, securitization and the credit crisis of 2007, inflation and deflation effects on the us and saudi stock markets.

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Significance of Inflation to Corporate Finance

Macroeconomics and hyperinflation in 1914-1923, dollar depreciation issue analysis.

Words: 1931

Government Spending Stimulation in the Fight Against Inflation

Hyperinflation analysis in zimbabwe.

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Hyperinlfation in Zimbabwe

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Gasoline Prices, Rates of Unemployment, Inflation, and Economic Growth

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Federal Reserve System: Inflation

Impact of zimbabwe’s monetary policy on its economy.

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Reasons for a Decrease of a Superannuation Assets Value

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“The Debt-Deflation Theory of Great Depressions” by Irving Fisher

Hyperinflations factors and eliminating strategies, “inflation rise hits us consumers” bbc article, hyperinflation in a real-life example, consumer price indices for gasoline and electricity in canada, maintenance of stable pricing, inflation expectations: households and forecasters, macroeconomic elements: the reduction of oil prices.

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Inflation in the 1970s

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Fall in Oil Prices in the mid 2014

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United Arab Emirates and Norway Economies

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International Financial Markets and Institutions

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Inflation Causes: Structuralism and Monetarism

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The Effects of Inflation Targeting

The euro zone’s rising inflation and unemployment rate, inflation tax – printing more money to cover the war expenses.

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Economic Condition of Singapore: Inflation Hits 5.2% in March

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Unemployment Issue in Europe

Inflation is here to stay, as prices will always go up.

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Exchange and Trade: Analyzing Market Movements

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Economic Health of the Economy: Memo

The effect of global financial crisis on saudi arabian economy.

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Keynesian Explanation of Recession

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Effect of a Permanent Increase in Oil Price on Inflation and Output

Consumer price index: measuring inflation.

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International Finance. Main Causes of Recent Financial Crisis

The cause of china’s inflation, china’s economic growth and inflation.

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Deficit Spending

The current impact of inflation and unemployment on germany’s political/economic system.

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Okun’s Law Associations

Pricing goods internationally.

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Are you better off than you were four years ago?

Cause of the financial crisis.

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Problem of China’s Inflation

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Inflation in Saudi Arabia

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Benefits Run Out for Spain’s Jobless: Theories of Unemployment

Unemployment rates in the united states, the monetary and fiscal policy implemented during the great recession, the empirical project: turkey.

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Inflation Rates in Sweden

Monetary and fiscal policies during the great recession.

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Role of the Federal Reserve in the US Economy

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Fiscal Policy and Monetary Policy

Scarcity and choice as economic issues.

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China Currency Policy and Inflation

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The Faults of the Consumer Price Index

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Analysis of Unemployment and Inflation in the United States

Analysis of the performance of domestic & multinational us restaurants, saudi arabia’s oil sector.

What is inflation?

Inflation has been top of mind for many over the past few years. But how long will it persist? In June 2022, inflation in the United States jumped to 9.1 percent, reaching the highest level since February 1982. The inflation rate has since slowed in the United States , as well as in Europe , Japan , and the United Kingdom , particularly in the final months of 2023. But even though global inflation is higher than it was before the COVID-19 pandemic, when it hovered around 2 percent, it’s receding to historical levels . In fact, by late 2022, investors were predicting that long-term inflation would settle around a modest 2.5 percent. That’s a far cry from fears that long-term inflation would mimic trends of the 1970s and early 1980s—when inflation exceeded 10 percent.

Get to know and directly engage with senior McKinsey experts on inflation.

Ondrej Burkacky is a senior partner in McKinsey’s Munich office, Axel Karlsson is a senior partner in the Stockholm office, Fernando Perez is a senior partner in the Miami office, Emily Reasor is a senior partner in the Denver office, and Daniel Swan is a senior partner in the Stamford, Connecticut, office.

Inflation refers to a broad rise in the prices of goods and services across the economy over time, eroding purchasing power for both consumers and businesses. Economic theory and practice, observed for many years and across many countries, shows that long-lasting periods of inflation are caused in large part by what’s known as an easy monetary policy . In other words, when a country’s central bank sets the interest rate too low or increases money growth too rapidly, inflation goes up. As a result, your dollar (or whatever currency you use) will not go as far today as it did yesterday. For example: in 1970, the average cup of coffee in the United States cost 25 cents; by 2019, it had climbed to $1.59. So for $5, you would have been able to buy about three cups of coffee in 2019, versus 20 cups in 1970. That’s inflation, and it isn’t limited to price spikes for any single item or service; it refers to increases in prices across a sector, such as retail or automotive—and, ultimately, a country’s economy.

How does inflation affect your daily life? You’ve probably seen high rates of inflation reflected in your bills—from groceries to utilities to even higher mortgage payments. Executives and corporate leaders have had to reckon with the effects of inflation too, figuring out how to protect margins while paying more for raw materials.

But inflation isn’t all bad. In a healthy economy, annual inflation is typically in the range of two percentage points, which is what economists consider a sign of pricing stability. When inflation is in this range, it can have positive effects: it can stimulate spending and thus spur demand and productivity when the economy is slowing down and needs a boost. But when inflation begins to surpass wage growth, it can be a warning sign of a struggling economy.

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Introducing McKinsey Explainers : Direct answers to complex questions

Inflation may be declining in many markets, but there’s still uncertainty ahead: without a significant surge in productivity, Western economies may be headed for a period of sustained inflation or major economic reset , as Japan has experienced in the first decades of the 21st century.

What does seem to be changing are leaders’ attitudes. According to the 2023 year-end McKinsey Global Survey on economic conditions , respondents reported less fear about inflation as a risk to global and domestic economic growth . But this sentiment varies significantly by region: European respondents were most concerned about the effects of inflation, whereas respondents in North America offered brighter views.

What causes inflation?

Monetary policy is a critical driver of inflation over the long term. The current high rate of inflation is a result of increased money supply , high raw materials costs , labor mismatches , and supply disruptions —exacerbated by geopolitical conflict .

In general, there are two primary types, or causes, of short-term inflation:

Demand-pull inflation occurs when the demand for goods and services in the economy exceeds the economy’s ability to produce them. For example, when demand for new cars recovered more quickly than anticipated from its sharp dip at the beginning of the COVID-19 pandemic, an intervening shortage in the supply of semiconductors made it hard for the automotive industry to keep up with this renewed demand. The subsequent shortage of new vehicles resulted in a spike in prices for new and used cars.
Cost-push inflation occurs when the rising price of input goods and services increases the price of final goods and services. For example, commodity prices spiked sharply during the pandemic as a result of radical shifts in demand, buying patterns, cost to serve, and perceived value across sectors and value chains. To offset inflation and minimize impact on financial performance, industrial companies were forced to increase prices for end consumers.

Learn more about McKinsey’s Growth, Marketing & Sales Practice.

What are some periods in history with high inflation?

Economists frequently compare the current inflationary period with the post–World War II era , when price controls, supply problems, and extraordinary demand in the United States fueled double-digit inflation gains—peaking at 20 percent in 1947—before subsiding at the end of the decade. Consumption patterns today have been similarly distorted, and supply chains have been disrupted by the pandemic.

The period from the mid-1960s through the early 1980s in the United States, sometimes called the “Great Inflation,” saw some of the country’s highest rates of inflation, with a peak of 14.8 percent in 1980. To combat this inflation, the Federal Reserve raised interest rates to nearly 20 percent. Some economists attribute this episode partially to monetary policy mistakes rather than to other causes, such as high oil prices. The Great Inflation signaled the need for public trust in the Federal Reserve’s ability to lessen inflationary pressures.

Inflation isn’t solely a modern-day phenomenon, of course. One very early example of inflation comes from Roman times, from around 200 to 300 CE. Roman leaders were struggling to fund an army big enough to deal with attackers from multiple fronts. To help, they watered down the silver in their coinage, causing the value of money to slowly fall—and inflation to pick up. This led merchants to raise their prices, causing widespread panic. In response, the emperor Diocletian issued what’s now known as the Edict on Maximum Prices, a series of price and wage controls designed to stop the rise of prices and wages (one helpful control was a maximum price for a male lion). But because the edict didn’t address the root cause of inflation—the impure silver coin—it didn’t fix the problem.

How is inflation measured?

Statistical agencies measure inflation first by determining the current value of a “basket” of various goods and services consumed by households, referred to as a price index. To calculate the rate of inflation over time, statisticians compare the value of the index over one period with that of another. Comparing one month with another gives a monthly rate of inflation, and comparing from year to year gives an annual rate of inflation.

In the United States, the Bureau of Labor Statistics publishes its Consumer Price Index (CPI), which measures the cost of items that urban consumers buy out of pocket. The CPI is broken down by region and is reported for the country as a whole. The Personal Consumption Expenditures (PCE) price index —published by the US Bureau of Economic Analysis—takes into account a broader range of consumer spending, including on healthcare. It is also weighted by data acquired through business surveys.

How does inflation affect consumers and companies differently?

Inflation affects consumers most directly, but businesses can also feel the impact:

Consumers lose purchasing power when the prices of items they buy, such as food, utilities, and gasoline, increase. This can lead to household belt-tightening and growing pessimism about the economy .
Companies lose purchasing power and risk seeing their margins decline , when prices increase for inputs used in production. These can include raw materials like coal and crude oil , intermediate products such as flour and steel, and finished machinery. In response, companies typically raise the prices of their products or services to offset inflation, meaning consumers absorb these price increases. The challenge for many companies is to strike the right balance between raising prices to cover input cost increases while simultaneously ensuring that they don’t raise prices so much that they suppress demand.

How can organizations respond to high inflation?

During periods of high inflation, companies typically pay more for materials , which decreases their margins. One way for companies to offset losses and maintain margins is by raising prices for consumers. However, if price increases are not executed thoughtfully, companies can damage customer relationships and depress sales —ultimately eroding the profits they were trying to protect.

When done successfully, recovering the cost of inflation for a given product can strengthen relationships and overall margins. There are five steps companies can take to ADAPT (adjust, develop, accelerate, plan, and track) to inflation:

Adjust discounting and promotions and maximize nonprice levers. This can include lengthening production schedules or adding surcharges and delivery fees for rush or low-volume orders.
Develop the art and science of price change. Instead of making across-the-board price changes, tailor pricing actions to account for inflation exposure, customer willingness to pay, and product attributes.
Accelerate decision making tenfold. Establish an “inflation council” that includes dedicated cross-functional, inflation-focused decision makers who can act quickly and nimbly on customer feedback.
Plan options beyond pricing to reduce costs. Use “value engineering” to reimagine a portfolio and provide cost-reducing alternatives to price increases.
Track execution relentlessly. Create a central supporting team to address revenue leakage and to manage performance rigorously. Traditional performance metrics can be less reliable when inflation is high .

Beyond pricing, a variety of commercial and technical levers can help companies deal with price increases in an inflationary market , but other sectors may require a more tailored response to pricing.

Learn more about our Financial Services , Industrials & Electronics , Operations , Strategy & Corporate Finance , and Growth, Marketing & Sales Practices.

How can CEOs help protect their organizations against uncertainty during periods of high inflation?

In today’s uncertain environment, in which organizations have a much wider range of stakeholders, leaders must think about performance beyond short-term profitability. CEOs should lead with the complete business cycle and their complete slate of stakeholders in mind.

CEOs need an inflation management playbook , just as central bankers do. Here are some important areas to keep in mind while scripting it:

Design. Leaders should motivate their organizations to raise the profile of design to a C-suite topic. Design choices for products and services are critical for responding to price volatility, scarcity of components, and higher production and servicing costs.
Supply chain. The most difficult task for CEOs may be convincing investors to accept supply chain resiliency as the new table stakes. Given geopolitical and economic realities, supply chain resiliency has become a crucial goal for supply chain leaders, alongside cost optimization.
Procurement. CEOs who empower their procurement organizations can raise the bar on value-creating contributions. Procurement leaders have told us time and again that the current market environment is the toughest they’ve experienced in decades. CEOs are beginning to recognize that purchasing leaders can be strategic partners by expanding their focus beyond cost cutting to value creation.
Feedback. A CEO can take a lead role in playing back the feedback the organization is hearing. In today’s tight labor market, CEOs should guide their companies to take a new approach to talent, focusing on compensation, cultural factors, and psychological safety .
Pricing. Forging new pricing relationships with customers will test CEOs in their role as the “ultimate integrator.” Repricing during inflationary times is typically unpleasant for companies and customers alike. With setting new prices, CEOs have the opportunity to forge deeper relationships with customers, by turning to promotions, personalization , and refreshed communications around value.
Agility. CEOs can strive to achieve a focus based more on strategic action and less on firefighting. Managing the implications of inflation calls for a cross-functional, disciplined, and agile response.

A practical example: How is inflation affecting the US healthcare industry?

Consumer prices for healthcare have rarely risen faster than the rate of inflation—but that’s what’s happening today. The impact of inflation on the broader economy has caused healthcare costs to rise faster than the rate of inflation. Experts also expect continued labor shortages in healthcare—gaps of up to 450,000 registered nurses and 80,000 doctors —even as demand for services continues to rise. This drives up consumer prices and means that higher inflation could persist. McKinsey analysis as of 2022 predicted that the annual US health expenditure is likely to be $370 billion higher by 2027 because of inflation.

This climate of risk could spur healthcare leaders to address productivity, using tech levers to boost productivity while also reducing costs. In order to weather the storm, leaders will need to quickly set high aspirations, align their organizations around them, and execute with speed .

What is deflation?

If inflation is one extreme of the pricing spectrum, deflation is the other. Deflation occurs when the overall level of prices in an economy declines and the purchasing power of currency increases. It can be driven by growth in productivity and the abundance of goods and services, by a decrease in demand, or by a decline in the supply of money and credit.

Generally, moderate deflation positively affects consumers’ pocketbooks, as they can purchase more with less money. However, deflation can be a sign of a weakening economy, leading to recessions and depressions. While inflation reduces purchasing power, it also reduces the value of debt. During a period of deflation, on the other hand, debt becomes more expensive. And for consumers, investments such as stocks, corporate bonds, and real estate become riskier.

A recent period of deflation in the United States was the Great Recession, between 2007 and 2008. In December 2008, more than half of executives surveyed by McKinsey expected deflation in their countries, and 44 percent expected to decrease the size of their workforces.

When taken to their extremes, both inflation and deflation can have significant negative effects on consumers, businesses, and investors.

For more in-depth exploration of these topics, see McKinsey’s Operations Insights collection. Learn more about Operations consulting , and check out operations-related job opportunities if you’re interested in working at McKinsey.

Articles referenced:

“ Investing in productivity growth ,” March 27, 2024, Jan Mischke , Chris Bradley , Marc Canal, Olivia White , Sven Smit , and Denitsa Georgieva
“ Economic conditions outlook during turbulent times, December 2023 ,” December 20, 2023
“ Forward Thinking on why we ignore inflation—from ancient times to the present—at our peril with Stephen King ,” November 1, 2023
“ Procurement 2023: Ten CPO actions to defy the toughest challenges ,” March 6, 2023, Roman Belotserkovskiy , Carolina Mazuera, Marta Mussacaleca , Marc Sommerer, and Jan Vandaele
“ Why you can’t tread water when inflation is persistently high ,” February 2, 2023, Marc Goedhart and Rosen Kotsev
“ Markets versus textbooks: Calculating today’s cost of equity ,” January 24, 2023, Vartika Gupta, David Kohn, Tim Koller , and Werner Rehm
“ Inflation-weary Americans are increasingly pessimistic about the economy ,” December 13, 2022, Gonzalo Charro, Andre Dua , Kweilin Ellingrud , Ryan Luby, and Sarah Pemberton
“ Inflation fighter and value creator: Procurement’s best-kept secret ,” October 31, 2022, Roman Belotserkovskiy , Ezra Greenberg , Daphne Luchtenberg, and Marta Mussacaleca
“ Prime Numbers: Rethink performance metrics when inflation is high ,” October 28, 2022, Vartika Gupta, David Kohn, Tim Koller , and Werner Rehm
“ The gathering storm: The threat to employee healthcare benefits ,” October 20, 2022, Aditya Gupta , Akshay Kapur , Monisha Machado-Pereira , and Shubham Singhal
“ Utility procurement: Ready to meet new market challenges ,” October 7, 2022, Roman Belotserkovskiy , Abhay Prasanna, and Anton Stetsenko
“ The gathering storm: The transformative impact of inflation on the healthcare sector ,” September 19, 2022, Addie Fleron, Aneesh Krishna , and Shubham Singhal
“ Pricing during inflation: Active management can preserve sustainable value ,” August 19, 2022, Niels Adler and Nicolas Magnette
“ Navigating inflation: A new playbook for CEOs ,” April 14, 2022, Asutosh Padhi , Sven Smit , Ezra Greenberg , and Roman Belotserkovskiy
“ How business operations can respond to price increases: A CEO guide ,” March 11, 2022, Andreas Behrendt , Axel Karlsson , Tarek Kasah, and Daniel Swan
“ Five ways to ADAPT pricing to inflation ,” February 25, 2022, Alex Abdelnour , Eric Bykowsky, Jesse Nading, Emily Reasor , and Ankit Sood
“ How COVID-19 is reshaping supply chains ,” November 23, 2021, Knut Alicke , Ed Barriball , and Vera Trautwein
“ Navigating the labor mismatch in US logistics and supply chains ,” December 10, 2021, Dilip Bhattacharjee , Felipe Bustamante, Andrew Curley, and Fernando Perez
“ Coping with the auto-semiconductor shortage: Strategies for success ,” May 27, 2021, Ondrej Burkacky , Stephanie Lingemann, and Klaus Pototzky

This article was updated in April 2024; it was originally published in August 2022.

Want to know more about inflation?

What is supply chain?

How business operations can respond to price increases: A CEO guide

Five ways to ADAPT pricing to inflation

The impact of global economies on US inflation: A test of the Phillips curve

Published: 02 June 2022
Volume 46 , pages 575–592, ( 2022 )

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Hany Guirguis ORCID: orcid.org/0000-0002-7635-7749 1 ,
Vaneesha Boney Dutra 2 &
Zoe McGreevy 3

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Understanding the relationship between employment and inflation is of great interest to policymakers and market participants. This paper introduces a new global inflation measure based on the principal component analysis (PCA) of the inflation rates of major US trade partners. We find that US domestic inflation correlates strongly with global inflation in the short- and long term. Moreover, global inflation leads the US inflation and accounts for 80% of the price discovery process. Additionally, we show that the Phillips curve equation improves in-sample and out-of-sample forecasting of US inflation rates by incorporating our spill-over-based global inflation (SGI) measure. Also, the utilization of the SGI in the Phillips equation increases the responsivity of the inflation rate data to the unemployment gap by 37%. In summary, the present results support the hypothesis that global inflation is a crucial determinant of domestic (US) inflation. The paper's main findings draw vital policy implications that emphasize the need for stronger cooperation among central banks to cope with the spill-over effect of global inflations on domestic economies.

Analysis of GDP and Inflation Drivers in the European Union

Globalization and inflation: a swiss perspective.

Avoid common mistakes on your manuscript.

1 Introduction

Understanding the relationship between employment and inflation is of great interest to policymakers and market participants. Recent studies have revealed a weakening trend in the traditional relationship between unemployment and inflation wherein a strengthening economy with falling unemployment tends to increase consumer demand, thus causing prices to rise. Potential explanations for the weakened relationship between inflation and economic slack discussed in the literature include non-linearity in the relationship between inflation and unemployment (Albuquerque and Baumann 2017 ), inaccurate measures of economic slack and inflation (Ball and Mazumder 2019 ), anchored inflationary expectations (Ball and Mazumder 2019 ), and globalization effects (Auer et al. 2019 ). Regardless of the underlying causes, flattening the Phillips curve has driven the US Federal Open Market Committee to re-evaluate its historical strategy of pre-emptive withdrawal of accommodation when unemployment rates drop a natural level.

Motivated by the theoretical models of Clarida et al. ( 2002 ) and Martínez-García and Wynne ( 2010 , 2013 ), we examine the spill-over effect of global inflation on US domestic inflation. First, we introduce a new measure for global inflation based on a principal component analysis (PCA) of the inflation rates of major US trade partners, including China, Canada, Mexico, Japan, Germany, Korea, and the UK. We then test how well our spill-over-based global inflation measure (SGI) correlates with domestic inflation in the short and long term. Finally, we demonstrate how incorporating our SGI parameter into the Phillips curve affects in-sample forecasts, out-of-sample forecasts, and the Phillips curve slope.

The remainder of this paper is organized into Sections 2 – 5 . Section 2 provides a theoretical review of the various explanations for the observed flattening of the slope of the Phillips curve. Section 3 estimates SGI and examines its contribution to the Phillips curve. In Section 4 , we report how incorporating the SGI index into the Phillips curve equation affects out-of-sample predictions of the US inflation rate. Finally, in Section 5 , a conclusion and policy implications of the analyses are given.

2 Theoretical review

Decades of research have questioned the relationship's stability between inflation and unemployment and its validity over time. These studies offer varying theories as to why this relationship may have changed. Some researchers attribute the weakened relationship to the nonlinear relationship between inflation and slack in the economy. Clark et al. ( 1996 ) found that when firms have excess capacity during periods of increasing demand, they have little pressure to raise prices. However, during periods of economic overheating when firms are operating close to their total capacity, strengthening demand triggers substantial price increases. Ball and Romer ( 1991 ) demonstrated that price rigidity plays a considerable role in inflation dynamics. For example, when inflation is higher, firms need to adjust price levels more frequently, which is reflected in a steepening of the Phillips curve slope. However, firms are under less pressure to adjust their prices when inflation is low. Thus, weak inflation for prolonged periods obviates the need for frequent price adjustments. Akerlof et al. ( 1996 ) have shown that employers prefer to lay off their least productive employees rather than enact wage cuts. Firm managers believe that even nominal wage cuts have a negative impact on morale, which disrupts labor efficiency. Thus, downward labor market adjustments are mediated primarily by unemployment rather than wage reductions. Because of wage rigidity, salary levels within a cycle are inversely related to the depth and length of short-term unemployment. For example, a more profound and extended period of high unemployment will suppress salary augmentation. Xu et al. ( 2015 ) observed an asymmetric, nonlinear Phillips curve with a roughly convex shape around the 75 th quantile, with linearity maintained around the 25 th quantile. In a subsequent study of the nonlinear behavior of inflation, Albuquerque and Baumann ( 2017 ) concluded that the inclusion of nonlinear specifications when generating Phillip's curve could improve the model's performance relative to the standard linear model.

Beyond the nonlinearity of the Phillips curve, several additional concerns have been raised, including the need for more accurate measures of unemployment and economic slack and the effects of anchored inflation and globalization. For the Phillips curve to provide valuable insights, policymakers must employ appropriate economic measures. For example, according to Ball and Mazumder ( 2019 ), the impact of economic slack on the labor market in the Phillips equation is better captured with short-term unemployment data than with long-term unemployment data. They argue that those who have been unemployed for more than 27 weeks and are still looking for a job are not competitive or not seriously looking for a job after being unemployed for such a long time. Thus, labor supply may be best reflected by the percentage of short-term unemployed workers in the labor market. For example, during the great recession, inflation did not fall from 2009 to 2011 as had been predicted, partly because short-term unemployment rose less sharply than total unemployment. Coibion and Gorodnichenko ( 2015 ) present an alternative explanation in which they explore the idea that firms' inflation expectations are best proxied by household expectations. They posit that an expectations-augmented Phillips curve, following Friedman's ( 1968 ) suggestion, utilizing household forecasts presents a more accurate representation of inflation events.

A third explanation for the apparent weakening relationship between employment level and inflation rate hangs on the Federal Reserve anchoring inflation expectations around its 2% target. As a result, inflation has become less responsive to fluctuations in the unemployment gap and the state of the economy. Benati ( 2008 ), Gurkaynak et al. ( 2010 ), Davis ( 2012 ), Davis ( 2014 ), and Bundick and Smith ( 2020 ) have confirmed that anchored inflation has flattened the slope of the Phillips curve by demonstrating the reduction in the responsiveness of inflation expectations to endogenous and exogenous domestic shocks. In addition, Jorgensen and Lansing ( 2019 ) have shown that accounting for anchored inflationary expectations within the framework of the New Keynesian model improves both the stability of the Phillips curve slope and inflation forecasting substantially.

A fourth possible explanation, which was adopted as the focus of this research, addresses the impact of globalization. Theoretically, the workhorse of the New Open Economy Macro Model (NOEM) introduced by Clarida et al. ( 2002 ) and Martínez-García and Wynne ( 2010 , 2013 ) provides a solid ground for the integration of global inflation in the formation of local inflation. Clarida et al. ( 2002 ) derived a two-country open economy version of the dynamic New Keynesian model. The authors show that the reaction function of the central banks should include both domestic and foreign inflation. Further, they show that the magnitude of the response of the domestic central bank to foreign inflation depends on the sign and the relative strength of the spillover of the foreign output gap on domestic marginal cost. Martínez-García and Wynne ( 2010 ) Extended Clarida’s model by allowing firms to set the prices of their good and services in the importing markets or what is referred to as the local currency pricing (LCP). The structure of their models incorporates three equations: open economy Phillips curve, open-economy IS, and domestic and foreign Taylor rule. Their workhorse New Open Economy Macro model (NOEM) has become the building stone of international macroeconomics. Martinez-Garcia and Wynne concluded that the Phillips curve is getting flattered as the local economies become globalized. Further, they show that the foreign output gap is an essential determinant in the Phillips curve equation. Following Martínez-García and Wynne ( 2014 ), Duncan and Martínez-garcía ( 2015 ) decompose the NOEM into two subsystems that divide local inflation into its components: global and differential inflation. Next, the authors established that local and international inflations are cointegrated.

The following papers further support the argument for including a measure of global inflation in our Phillips Curve equation. Bonello and Swartz ( 1978 ) provide a succinct overview of essays detailing the theory and economic challenges fiscal and monetary policy faces over time. Their summation highlights the notion that internationally, debt-ridden countries threaten to destabilize economies beyond their borders, thus the need to incorporate global measures when examining inflation and other indicators of domestic economic health. Black ( 1978 ) examines the impact of international historical shocks and economic disturbances on global economies. Frisch ( 1977 ) provides a comprehensive overview of inflationary theories and the Phillips curve for 1963–1975. Also, Bruno ( 1978 ) examines pricing dynamics and the price adjustment process and concludes that exchange rates and import prices significantly impact the pricing mechanism. Moreover, they directly note that a two-dimensional Phillips Curve may not be sufficient in an open economy and should include alternative measures/dimensions. Also, Cebula and Frewer ( 1980 ) analyze, empirically, whether and to what extent there is an ‘imported’ component to domestic inflation. Specifically, they examine the ‘price effect’ and whether petroleum prices/imports have contributed significantly to domestic inflation. Finally, they conclude that exogenous, international forces increasingly impact economies of developed nations and that one-way inflation is imported is via petroleum prices and imports.

Recently, Obstfeld ( 2020 ) describes the impact of globalization on domestic inflation through the global competitive environment and import pricing channels. Specifically, Obstfeld posits that the global competitive environment exerts downward pressure on domestic inflation rates by discouraging firms from increasing their prices in response to a higher marginal cost of production. Meanwhile, according to this view (Sbordone 2009 ), global competition facilitates the US economy's access to global slack within emerging and developing countries, which weakens the bargaining power of the US domestic factor of production, thereby limiting negotiations for higher compensation even when the domestic economy is operating above its potential output. Additionally, the availability of low-priced imported goods affects domestic inflation of both production and consumer goods.

Auer et al. ( 2017 ) have demonstrated that the growth of trade in intermediate goods and services has been the driving force of the increasing (decreasing) role of global (domestic) slack in the Phillips curve equation. They attribute this increased importance to expanding global value and supply chains in response to the broad worldwide integration of production processes. Auer et al. ( 2019 ) found that globalization could explain 51% of the variance in producer price inflation in a sample of 30 countries. Half of this variance was attributed to the cross-border propagation of cost shocks through international input–output linkages. Similarly, Ciccarelli and Mojon ( 2010 ) found that inflation in 22 OECD countries had a common factor accounting for 70% of these countries' inflation variance from 1960 to 2008. Incorporating this common global factor in the inflation equation for the 22 OECD countries improves the out-of-sample forecasting of inflation rates. A wide variety of variables have been incorporated into Phillips' equation in efforts to capture the growing impact of globalization, including global commodity prices, global slack, exchange rates, import and oil prices, the global output gap, and nonlinear exchange rate pass-through (Borio and Filardo 2007 ; Jašová et al. 2018 ; and Forbes 2019 ). These studies demonstrate the importance of globalization in explaining and forecasting domestic inflation while underscoring the diminishing role of domestic slack in explaining inflation rates.

In this paper, we explore the aforementioned inflation commonalities and hypothesize and show that inflation should, at least in part, be modeled as a global rather than a local phenomenon. Our research focuses on the spillover effect of international inflation on US inflation. Specifically, we examine whether incorporating global inflation data into Phillip’s curve would accurately represent the relationship between unemployment and inflation.

In sum, these papers lend further credence to our notion that, in a changing environment where there is greater global interdependence, global measures may be critical in examining the inflationary environment.

3 Estimation techniques and empirical results

3.1.1 global inflation.

We collect quarterly Consumer Price Index (CPI) data on all items for the USA and its leading trade partners (China, Canada, Mexico, Japan, Germany, Korea, and the UK) from 2003:Q1 to 2019:Q4. We then estimate each country's inflation rate (percentage) from the previous year. Descriptive statistics for the annualized quarterly inflation rates are shown in Table 1 , and US inflation rates are plotted against the inflation rates of its main trade partners in Fig. 1 . Average inflation rates for US trade partners vary from 4.08% (Mexico) to 0.257% (Japan). Notably, China exhibits the most highly variant inflation rate, fluctuating between 7.78% and -1.54%, with a standard deviation of 1.84%. Germany, which shows the second-lowest average inflation rate of 1.42%, has the most stable domestic prices with a standard deviation of only 0.68%. Jarque–Bera statistics show that inflation in China, Canada, Mexico, and Japan do not follow a normal distribution. The US inflation rate correlates strongly with inflation rates in Germany (r = 0.80), Canada (0.68), China (0.60), Korea (0.53), and UK (0.52), but not with inflation rates in Japan (0.17) and Mexico (0.03) (see Table 1 and Fig. 1 ).

CPI of inflation for the USA and main US trade partners. Annualized quarterly inflation rates are shown from 2003:Q1 to 2019:Q4. The y axes represent inflation rate. The x axes represent time from 2003 through 2019

Consistent with the work of Bernanke et al. ( 2005 ), we use PCA to create our SGI, an independent composite factor representing global inflation. We apply PCA to the inflation rates in China, Canada, Mexico, Japan, Germany, Korea, and the UK, keeping the first principal component as our proxy variable for global inflation and find that the US inflation rate and our global inflation index SGI are strongly correlated in the short run, with a correlation coefficient of 0.79 (Fig. 2 ).

US inflation versus global inflation. The graph shows the US inflation and an index for global inflation based on the first principal component of the inflation rates in China, Canada, Mexico, Japan, Germany, Korea, and the UK. The left axis represents the inflation rate, the right y-axis represents the values of the index of global inflation, and the x-axis represents the time from 2003 through 2019

We then test for long-term correlation and price discovery between domestic inflation and the global inflation index with Johansen's ( 1988 ) cointegration test and Hasbrouck’s ( 1995 ) price discovery technique. Johansen ( 1988 ) introduced a full-information maximum likelihood technique that enables simultaneous estimation of the long-run equilibrium relationship and short-term linkages, where the results do not depend on which variable is dependent. Following Johansen and Juselius ( 1990 ), let us consider a vector X t of p non-stationary I(1) series. Such a series has the following vector autoregressive representation (VAR):

where X t is a (p × 1) vector of I(1) non-stationary p time series, T is the number of observations, n is the number of lags, and D t values are centered seasonal dummies that sum to zero over the entire sample period. If all of the time series in the VAR have a single unit root that can be removed by taking the first difference, then the VAR can be expressed as

In this framework, the cointegration hypothesis can be tested by evaluating the rank of the long-run impact matrix (Π). More specifically, the number of distinct cointegrating vectors, r, is equal to the rank of Π, or the number of characteristic roots of Π that are statistically different from zero. As stated by Juselius ( 2006 ), “If X t is ~ I(1), then ∆X t is stationary and can’t be written in terms of the non-stationary variable ΠX t−1 . Therefore, Π can either be zero or it must have the reduced rank ( $\alpha {\beta }^{\mathrm{^{\prime}}})$ ”, where α and β are the p × r matrices of the speed of adjustment parameters and the cointegrating parameters respectively, and r is the number of cointegrating relationships (0 < r < p). Accordingly, Eq. ( 2 ) can be written in terms of the error correction feature ( $\alpha {\beta }^{\mathrm{^{\prime}}}{X}_{t-1})$ and the VAR to form the vector error correction model as follows:

Price discovery describes how the information for a particular asset is transmitted among different markets in which the asset is traded. Generally, the efficient markets hypothesis requires that asset information be reflected quickly and fully in asset pricing. Moreover, since the introduction of modern portfolio theory in the 1950s—wherein mean–variance analysis is used to assemble a portfolio designed to maximize return for a given level of risk—academics and practitioners have been keen to better understand price discovery and the co-movement of different types of assets in order to better predict the magnitudes of benefit for particular diversification schemes. Barkham and Geltner ( 1995 ) point out that price discovery can happen first in the unsecuritized market due to the larger market size and trading volumes. More informed and specialized investors conduct trades. The estimated speed of adjustment parameters, $\alpha$ , can then be utilized to examine price discovery in the different markets. For example, suppose all adjustment parameters are statistically significant with the correct sign for stability. In that case, none of the markets are weakly exogenous, and the adjustment process to restore equilibrium will take place in all the markets. In this case, the relative magnitude of the coefficients will determine which market leads in terms of price discovery. Conversely, suppose α is statistically significant only in the first market. In that case, the price discovery occurs in the other markets, and the first market adjusts to remove the disequilibrium in the long-term relationship.

In our paper, we utilize Hasbrouck's ( 1995 ) technique to estimate the share of each market in price discovery. First, Hasbrouck presents $\Delta {X}_{t}$ in Eq. ( 3 ) by the following vector moving-average:

where $\Psi \left(L\right)$ is a polynomial in the lag operator. When X attains its long-term equilibrium value (X*), Eq. ( 3 ) can be written as follows:

where $\beta_\bot\alpha'_\bot\varepsilon_t$ is the long-term effect of the innovations of n markets. Additionally, the variance of $\theta \Psi {\varepsilon }_{t}$ is $\Psi \Sigma {\Psi }^{\mathrm{^{\prime}}}$ under the assumption that p markets respond identically to innovations in efficient prices in the long-run.

In accordance with the work of Hasbrouck ( 1995 ), we decompose Var( $\theta \Psi {\varepsilon }_{t}$ ) into its n components ( ${v}_{i}^{2}$ ) attributable to each market and then derive a Cholesky decomposition of $\Sigma$ in terms of F, where $\Sigma$ = $F{F}^{\mathrm{^{\prime}}}$ , and calculate ${V}_{i}^{2}$ as follows:

The share of each market in price discovery ( ${S}_{i}$ ) is then calculated by dividing ${V}_{i}^{2}$ by the total innovation variance as follows:

We commence empirical testing by examining the classical assumption of the non-stationarity of our series. To do so, we utilize the Dickey-Fuller unit root test, wherein the number of lags is determined by the Akaike information criterion. As illustrated by Table 2 , we find that taking the first difference of each series results in the removal of one-unit root from US inflation and global inflation rates (5% significance level).

We then perform Johansen’s cointegration trace test between US inflation and global inflation. To determine the stability of the underlying long-term relationships among the series, we run Johansen’s test iteratively over the samples with forward estimation. The first subsample for forward estimation is from 2003:Q1 to 2013:Q1, and the last (full) sample runs from 2003:Q1 to 2019:Q4 (36 iterations). Finally, for each two-series set that is cointegrated, we run the Hasbrouck ( 1995 ) test and calculate the contribution of each set to the process of price discovery.

The trace test for foreword interactions confirms a strong cointegration relationship between domestic and global inflation rates in forward-rolling estimates. The contribution of each inflation series to price discovery when two sets are cointegrated can be seen in Fig. 3 , which shows cointegration of the two-time series in all the forward tests and illustrates the dominance of a global inflation index. Notably, the average statistics for all forward-rolling estimates show that global inflation leads US inflation and accounts for 80% of price discovery. In summary, our analysis confirms strong short- and long-term relationships between global inflation and US domestic inflation.

Forward rolling trace test and Hasbrouck test results. A. Forward rolling trace test for cointegration (y axis) between US inflation and global inflation (solid line); the 95% critical value is shown with a dotted line. B. Hasbrouck test outcome for subsamples starting on 2003:Q1 and ending from 2013:Q1 to 2019:Q4. The y axis represents percent contribution to price discovery of US inflation (solid line curve) and of global inflation (broken line curve). Subsample end dates are shown on the horizontal axis

3.1.2 Phillips curve and global inflation

This section examines the impact of accounting for global inflation on the performance of the Phillips curve equation. We follow Laubach and Williams’s specifications ( 2003 ) to estimate an augmented Phillips curve. However, we replace the core PCE with the CPI as our inflation rate measurements. The other determinants in the CPI inflation $({\pi }_{CPI})$ equation are the expected inflation $({\pi }_{CPI}^{e}$ ), output Gap ( $\tilde{y })$ , crude imported oil inflation gap ( ${\pi }_{oil}-{\pi }_{PCE}^{e}),$ Core import (excluding petroleum, computers, and semiconductor), inflation gap ( ${\pi }_{import}-{\pi }_{PCE}^{e}),$ three moving average inflation $(MA3{\pi }_{CPI})$ , and five moving average inflation ( $MA5{\pi }_{CPI}$ ). We also use a time trend (D 1 ) and a dummy that takes the value of one for 2008:Q1–2009:Q3 and zero elsewhere. Thus, the first specification of the Phillips curve can be stated as follows:

where the output gap is the difference between the unemployment rate (U3) and the natural rate of unemployment published by the congressional budget office. Meanwhile, the expected inflation at time t is the average of the four-step out-of-sample forecasts calculated from regressing inflation on a constant and three lags of the inflation rate. Next, we account for the spillover effect of global inflation by including the first principal component of global inflation rates in the Phillips equation as follows:

We then apply the ordinary least squares technique to estimate the two specifications for the entire sample from 2003:Q1 to 2019:Q4 and then correct the ordinary least square regressions for autocorrelation and heteroscedasticity using the Newey and West ( 1987 ) method. Both regressions are reported in Table 3 . Comparing the results that we obtain with and without augmentation of the Phillips equation with our global inflation index, namely SGI, reveals that the augmentation has three notable effects: (1) increasing the adjusted R 2 value by 15%, from 0.61 to 0.71; (2) increasing the absolute value of the slope of the Phillips curve by 36.8%, from -0.19 to -0.26; and (3) global inflation spillover has a positive effect on US inflation significant at the 1% level.

To examine the stability of the superior performance of the second specification, we calculate adjusted R 2 values, in-sample stability, and estimated coefficients of global inflation, output gap, and their p-values over 27 forward-rolling subperiods starting on 2003:Q1 and ending from 2013:Q1 to 2019:Q4.

The results confirm the superior performance of the Phillips curve specification augmented by the global inflation index as shown in Figs. 4 and 5 . Additionally, the slope of the Phillips curve is statistically significant at the 5% level between 2014:Q4 and 2015:Q3 only when global inflation is incorporated in the Phillips equation. Notably, from 2014:Q4 to 2015:Q3, there is an observable divergence of the stronger economies in the USA and UK from the stagnant economies in Japan and Eurozone countries.

Forward rolling Phillips curve analysis. A. Graph of estimated coefficients of global inflation. B. Graph of p-values of the estimated coefficients in the graph shown in panel A. C. Graph of output gap values between the estimated coefficients for specification I (solid line) and specification II (dotted line). D. Graph of p-values from forward rolling tests of subsamples starting on 2003:Q1 and ending from 2011:Q1 to 2019:Q4. In B and D, data for specification I and II are shown with broken and solid lines, respectively. In C and D, the dash-dot lines represent 1% (lower) and 5% (higher) significance levels

Primary comparison of the performance of specifications I and II. A. Graph of adjusted R. 2 values calculated from forward rolling regressions of specification I (dotted line), which is generated by a Phillips equation based on the US CPI, and of specification II (solid line), which is generated by a Phillips equation based on the US CPI as well as an augmentation with the presently developed SGI index of global inflation. B. Graph of in-sample forecast data generated by specification I (dotted line) and specification II (solid line), together with a plot of the CPI (dashed line) for the same time period. In both graphs, subsamples start on 2003:01 and end from 2011:Q1 to 2019:Q4

The stagnant economies in the Eurozone and Japan decreased the inflation rates in these countries, which put downward pressure on the US inflation rate and weakened its relationship with the output gap. In conclusion, accounting for the spillover effect of global inflation on US inflation in the Phillips equation stabilizes the slope of the Phillips curve, as captured by the second specification.

4 Out-of-sample predictions and properties of the prediction errors

The accuracy of inflation forecasts is limited by inconsistencies across forecasting techniques and model specifications. In their review of forecasting models and comparative analysis of the performance of Phillips curve forecasting specifications, Stock and Watson ( 2010 ) find that a univariate forecasting model tends to outperform more complex multivariate models. Alvarez-Diaz and Gupta 2016 subsequently replicated this outcome. Abdelsalam ( 2017 ), who notes inherent specification issues that can impact the predictive power of Phillips curves and analyses of augmented versions of Phillips equations that incorporate time-varying coefficients, finds that augmentations can improve forecast accuracy. Gupta et al. ( 2017 ) have shown that a factor augmented-qualitative VAR can outperform other augmented VAR models. Furthermore, Balcilar et al. ( 2017 ) have demonstrated that the VARFIMA (vector autoregressive fractionally integrated moving average) model is superior to the standard model.

A quick review of the literature indicates that there may not be a one-size-fits-all model or specification. Stock and Watson ( 2010 ) make a valid argument that this variability in utility should not be surprising given the fluctuations in US inflation dynamics that have accompanied a transforming US economy and changes in monetary policy regimes. To that end, Inoue et al. ( 2017 ) find significant evidence that a forecasting model's performance can be sensitive to estimation window size. They propose a methodology for determining an optimal estimation period that minimizes conditional mean square forecasting error (MSFE). They show that their window selection method deteriorates for models containing numerous predictors with parameters with differing time-varying patterns. They find that an unemployment-based Phillips curve has inflationary predictive power when optimal sizes are used.

To examine the effect of global inflation on an out-of-sample forecast of the US inflation rate, we conduct one-step predictions based on rolling window regressions. First, estimated coefficients from each regression are used to predict the inflation rate of the next quarter in the forward estimation period, with the first subsample being from 2003:Q1 to 2013:Q1, and the last (total) sample running from 2003:Q1 to 2019:Q3. This process generates 27 out-of-sample predictions (Fig. 6 ) for each model.

Graph of out-of-sample forecasts of the US inflation rate. The inflation rate forecasts (x axis) are calculated from the forward rolling regression of specification I (dotted line) and specification II (dashed line). The specification forecast plots are overlain on a plot of the US CPI (solid line). The subsamples start on 2003:01 and end from 2011:01 to 2019:04 (y axis is time). Specifications I and II are as defined as in Fig. 5

Following Clapp and Giaccotto's ( 2002 ) approach, we evaluate model performance according to three criteria: the desirability of prediction error properties, the relative efficiency of predictions, and the informational efficiency of projections. A desirable property for forecasting errors is that they show a normal distribution around zero with constant variance. The tendency of a model to over-predict (under-predict) can be detected by a left (right) skewed distribution with a statistically significant negative (positive) mean. Highly inaccurate forecasts can result in excessively negative kurtosis.

We test for relative efficiency by calculating Theil’s U 2 value, mean forecasting error (MFE), mean absolute forecasting error (MAFE), and root means squared forecasting error (RMSFE) for 27 forecasts, as follows:

where a Theil’s U 2 value close to one indicates that the equation can effectively predict future values of the dependent variable, and a negative Theil’s U 2 value suggests that the naive specification outperforms forecasts of the equation. To test whether our forecasts are informationally efficient, we first regress the inflation rate on its prediction and a constant term, as follows:

To explore the source of inefficiency or the forecast error, if any, we calculate the mean squared forecasting error (MSPE) based on our estimates from Eq. ( 11 ), as follows:

where ( ${\overline{{inflation}^{e}} - \overline{inflation})}^{2}$ ) refers to the average actual and forecasted series, n is the number of observations, $\widehat{{\beta }_{i}}$ is the estimated coefficient, and ESS is the sum of squared forecasting errors. We then calculate Theil’s decomposition of the MSPE by dividing Eq. ( 12 ) by the MSPE, as follows:

where U bias is a measure of the bias in ${\beta }_{0}$ , U regression is a measure of the bias in ${\beta }_{1}$ , and U error is a measure of the portion of the forecast errors that can be attributed to equation residuals. Informational efficiency requires that $\widehat{{\beta }_{0}}$ and $\widehat{{\beta }_{i}}$ be statistically consistent with zero and one, respectively. If so, the bias will be captured predominantly by U error , which should be close to one.

As reported in Table 4 , the two models produce normally distributed forecasting errors with means that are statistically different from zero at the 5% percent level. There are several parameters by which specification II (CPI with SGI index of global inflation) outperforms specification I (CPI). Relative to specification I, specification II yield a smaller standard deviation of forecasting errors, exhibits less overshooting with the minimum, and produces more accurate forecasts, as indicated by smaller MAFE, MAFE, and RMFSE values.

Note that a negative Theil’s U 2 value is obtained for specification I, indicating that the specification fails to forecast its inflation rate (Table 4 ). Notably, the second specification has a positive Theil’s U 2 value, which indicates that it outperforms the forecasts generated by the naïve model. Additionally, Theil’s decomposition of MSPE shows that 73% (47%) of the MSPE in specification I (Specification II) can be attributed to U bias and U regression . Thus, Theil’s decomposition confirms the superiority of specification II, with the component of the MSPE value being attributed to U error is 53% for specification II but only 29% for specification I. The superior performance of specification II is further confirmed in the out-of-sample forecast plots shown in Fig. 5 . Thus, our forecasts indicate that accounting for spillover effects of global inflation in the Phillips equation improves out-of-sample forecasting of the Phillips curve for the US inflation rate.

5 Conclusion

This paper explores the effects of a new measure for global inflation on domestic inflation in the USA. This new measure, termed SGI, is a PCA-based independent composite factor representing global inflation. The SGI exhibits stable and robust short- and long-term correlations with the domestic inflation rate in the USA. The global inflation variable leads the US inflation rate and contributes on the average 80% to price discovery. Incorporating the SGI variable improves the in-sample overall fit by 14.5% and increases the Phillips curve slope by 37%. Furthermore, accounting for spillover effects from global inflation dynamics in the Phillips equation improves out-of-sample forecasting of the Phillips curve for the US inflation rate.

There are many policy implications of the current research. First, globalization can potentially explain the coincidence of solid growth and low inflation before the COVID-19 recession despite the US economy operating around its potential level. Thus, these results support the recent changes in the Federal Reserve's Statement on Longer-Run Goals and Strategy, which call for abandoning the longstanding principle of reducing accommodation preemptively when the unemployment rate nears its natural rate. Second, the presently documented spillover phenomenon indicates that US monetary policy should respond to global inflation in the economies of its primary trade partners. Thus, strong coordination among major central banks is vital for local and international inflation stability. Third, the social and economic cost of restoring domestic inflation to its long-term goals could increase as the domestic economy is more responsive to global exogenous shocks.

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Guirguis, H., Dutra, V.B. & McGreevy, Z. The impact of global economies on US inflation: A test of the Phillips curve. J Econ Finan 46 , 575–592 (2022). https://doi.org/10.1007/s12197-022-09583-x

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Research Paper - Inflation Rate in the Philippines

This research paper tackles the factors that affects the sudden rise of the inflation rate in the Philippines.

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Benedict Chua

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This research uses annual time series data on inflation rates in the Philippines from 1960 to 2017, to model and forecast inflation using ARIMA models. Diagnostic tests indicate that P is I(1). The study presents the ARIMA (1, 1, 3). The diagnostic tests further imply that the presented optimal ARIMA (1, 1, 3) model is stable and acceptable for predicting inflation in the Philippines. The results of the study apparently show that P will fall down from 5.6% in 2018 to approximately 0.3% in 2027. The Bangko Sentral ng Pilipinas is expected to continue implementing it inflation targeting policy framework since it proves to work well for the economy.

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Inflation is one of the most complex macroeconomic phenomena in industrialized economies. This study mainly focuses on examining inflation-related factors in Malaysia. Stepwise linear Regression analysis was applied via SPSS to investigate the significance of the inflation rate, exchange rate, money supply, interest rate and unemployment rate relationship by using time series from 1995 to 2019. The study aimed at determinants of factors that influence Malaysia's inflation. The analytical results found that the money supply and exchange rate have positive impact on the inflation, whereas the unemployment rate and interest rate have negative impact on the inflation. Moreover, The hypothetical results are supported to the exchange rate and interest rate. The remaining other two independent variables do not support the hypotheses. The study suggests that Inflation, pushed up by money growth rate as well as Ringgit depreciation and higher interest rates, has adversely impacted produc...

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Comparison between Civilian government and Military Administrations Economic Policy Analysis. The purpose of this paper is to make analysis of inflation rate during military regime by comparing it with the civilian regime in Pakistan. The paper will also focus on the major events which were the main causes of creating inflation and the remedies took by the than governments to mitigate the effect on masses and policies made to counter the inflation.

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Flush With Cash, Tether Has Got Microsoft, Google, and Amazon in Its Crosshairs

Paolo Ardoino chief executive officer of Tether Holdings Ltd. at the Paris Blockchain Week summit in Paris France on...

Paolo Ardoino , the new CEO of crypto company Tether , is grappling with a difficult but enviable problem: How best to spend billions of dollars. Recently flush with cash, Tether is pushing into unfamiliar new fields, like AI . Ardoino’s ambitious plan is to mount a challenge to Microsoft, Google, and Amazon.

Tether, which is incorporated in the British Virgin Islands, is among the world’s largest crypto businesses. The majority of its revenue comes from its stablecoin, USDT, which is pegged to a dollar valuation by a basket of cash and other assets held in reserve.

The model is relatively simple: Tether receives US dollars in exchange for tokens that customers can use to trade freely in the crypto market. It keeps some of those dollars in cash, trades most for interest-bearing securities, and loans some out. If ever a customer wants to exchange a USDT token for the dollar it represents, Tether draws from the pot, but in the meantime it generates income from the assets it holds.

Tether’s reserve consists largely of short-term US government bonds, the income from which is tied to the prevailing interest rate. Meaning that the company has become increasingly profitable as central banks have raised rates in response to inflation. Tether recently reported $5.2 billion in profit for the first half of 2024, from a $118.5 billion reserve.

Under Ardoino, who took the role of chief executive in December after serving for six years as CTO, Tether is looking for something to do with all that spare change. Some of the money has gone toward building a buffer for the USDT reserve, says Ardoino, but the rest is being plowed into the company’s new venture investment division, Tether Evo. The company has already taken a majority stake in neural implant technology startup Blackrock Neurotech and invested in a data center operator , Northern Data Group, whose infrastructure is used for training AI models.

Tether has courted its fair share of controversy. In 2021, the company reached a $41 million settlement with US regulators, which had accused it of making misleading statements about the composition of its reserve. In 2023, Tether was alleged to have used fraudulent means to obtain banking services early in its history. Also, the UN and blockchain analytics firms have alleged that USDT has become a favored tool for money laundering, terrorist financing, and other illicit activity, though Tether disputes the characterization .

The company is misunderstood, Ardoino says. Its most pressing concern, he says, is exporting the crypto ethos of decentralization—the idea that power should pool in the hands of the many, not the few—to the AI industry and other emerging areas of technology. “Having a player independent of the classic actors is going to be very, very important,” he says.

Ardoino, who is of Italian descent and maintains a base in Switzerland, spoke to WIRED over the phone earlier this month. The following interview has been edited for brevity and clarity.

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WIRED: This year, Tether has moved to diversify its business model with a push into venture capital. Tell me about the rationale.

Ardoino: Tether has become extremely profitable in the last two years thanks to the increase in interest rates. When Tether started, you could make 0.2 percent on the reserve, but today you can make 5.5 percent. Of course, that might be time-limited—we are hearing about potential rate cuts—but it’s very hard even with inflation at 3 or 4 percent to go back to the 0.2 percent scenario.

In the last 24 months, Tether has accrued around $11.9 billion profit. With this amount of money, we could have distributed it all to shareholders, to make everyone happy. Instead, part of it is being added to the reserve to further back the stablecoin, and the rest is basically being held in the investment arm.

What is your venture investment thesis? It seems like you are looking beyond the crypto industry.

We came from bitcoin—we are bitcoiners at heart. Maybe we are not perfect at being humans, but we are trying to carry with us the bitcoin ethos in terms of financial freedom, freedom of speech, and freedom of access to technology in every venture we invest in.

The concept of decentralization can be applied to different areas, like artificial intelligence. We are already seeing how AI is being heavily politicized . We believe that having a player independent of the classic actors—like Amazon, Microsoft, and Google—is going to be very, very important.

The same goes for another important technology: brain-computer interface , or BCI. That will be fundamental in the future. Building brain-computer interfaces that respect people’s privacy—that ensure data remains local and will not be harvested by the same companies running social media platforms—will be very important.

We are not a classic VC. We don’t throw money at companies just to try to find a unicorn that will make us 100X. Of course, that would be nice, but it has to be aligned with our vision. Interdependence, resilience, and disintermediation—these terms are very important to us.

How much capital will Tether commit to venture investments?

We will always prioritize the stablecoin business, because risk management is very important. Right now, we have a good buffer on top of the reserve, but if USDT keeps expanding, we will expand that proportionally.

But almost everything else—I would say more than 90 percent of the profit Tether makes—we will look to reinvest in things that matter to us and our community. We don’t need to give out big chunks of money as dividends.

Some VCs have done a poor job of making character assessments with respect to crypto founders, some of whom—like Sam Bankman-Fried —were later convicted of fraud. How do you plan to ensure Tether doesn’t make the same mistakes?

Looking under every rock and doing the deepest level of due diligence is the only way to save the capital you invest. Not every single investment will be perfect, but we will come into every company with our heart and brain to ensure the maximal result.

We also work directly with the management; if things need to be improved, we will help them. Otherwise, we are ready to change the management. Technology has no faults; if a company does not work, it is usually because the management does not work. We are very, very serious about our approach when we invest in things, just because we care so much.

What did you make of the recent allegations made against Northern Data, one of your portfolio companies, which has been accused of committing securities fraud?

That is something that will be evaluated by a court. We have been working with Northern Data for quite some time. The company has enormous potential; it can provide an independent voice from the three big companies in the data center business. It’s not for me to comment on allegations made by a couple of disgruntled ex-employees. Northern Data has responded very strongly to those allegations, and we stand by our investment

Let’s talk a little about the current regulatory environment. It could be said that Tether acts a lot like a bank: It receives deposits, which it holds in cash and securities or loans out. Why shouldn’t Tether be subject to the same regulations as the banks?

The banks are lending out 90 percent of their balance sheet, meaning they are only 10 percent collateralized. Tether has 105 percent collateralization at the moment. I think it would be very unfair to compare Tether to a bank. It’s like saying, “A car has an engine like a plane, so we will try to regulate cars and planes in the same way.”

It’s been reported that Tether has not sought a license to operate in the EU under the Markets in Crypto-Assets (MiCA) regime. Does Tether plan to exit the European market?

We are formalizing our strategy for the European market. MiCA imposes a limit on the [daily] issuance and transaction volume of non-Euro-based stablecoins, like USDT. [The idea is to prevent US dollar-denominated stablecoins from displacing the Euro as the primary medium of exchange within the EU. ] I actually like that, because it will not hurt anyone.

But another limitation is on reserves. For a stablecoin like USDT, up to 60 percent of the reserve would have to be in cash deposits under MiCA. If you have a stablecoin with, say, €10 billion in reserve, you would need to put €6 billion in the bank. The bank can lend out up to 90 percent of that, keeping only €600 million. Imagine a customer asks to redeem €2 billion [worth of stablecoin], but the bank has only €600 million. Then you are in a situation in which both the bank and stablecoin go bankrupt. I don’t think it’s safe. Actually, it’s a way for stablecoins to create additional systemic risks in Europe, rather than reducing them.

The continued absence of a full audit of Tether’s reserve has given rise to speculation that USDT is not—or at least has not been in the past—backed one-to-one by its reserve. Why has Tether not been able to deliver on its promise to provide a comprehensive audit?

The audit is still a high priority. When it comes to stablecoins, you have Senator Warren in the US telling the Big Four auditing firms that they should be aware of onboarding new crypto customers, especially after FTX. [In March 2023, Senator Elizabeth Warren called for an accounting regulator to “rein in sham audits of crypto firms.”] FTX didn’t help at all; they were the heroes of mainstream media and fucked it up for everyone.

Has Tether been explicitly rejected by the Big Four auditing firms? Has Tether applied and been turned away?

We’ve had discussions with some of them.

What reasons did they provide?

That it was not the right moment, basically. If you are a Big Four auditing firm, tens of thousands of your customers will be banks. They might not be happy if you have a stablecoin as a customer. That’s my speculation, but Tether has created a digital dollar that allows people to have checking and savings accounts, so stablecoins could be considered a threat to the banking industry.

It’s not only Tether; Circle [the company that issues USDC, the second-largest stablecoin behind USDT] does not have an audit—it has an attestation as well. This has been misunderstood for a long time and misreported by mainstream media. If the other stablecoins are so holy, why do they not have an audit? Even the stablecoin portrayed as the most regulated in the world [USDC] doesn’t have an audit. It’s an industry problem.

[Circle is a customer of Deloitte, a Big Four auditing firm, which conducts a monthly check on the accuracy of statements about the size and composition of the USDC reserve, but has not published a full audit since 2021.]

For absolute clarity: Has Tether ever issued USDT tokens that were not backed by dollar reserves?

Tether has always been backed. In 2022 a short attack on Tether tried to cause a bank run, and we processed more than $20 billion of redemptions in 20 days. I think Tether should have a little bit of credit.

At least in 2024, it should be admitted that maybe the original assessments of Tether’s credibility were not entirely correct. We don’t need a medal, but not throwing rocks at us when we are trying to create the future of finance would be nice.

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