Few would disagree that the drivers of inflation have changed over the last 30 years. This has manifested through lower average inflation rates and created a disconnect between G4 inflation dynamics over the last decade (Chart 1). Changing inflation dynamics alongside a rarely seen and seemingly unconstrained pro-growth fiscal policy mandate mean even the experts struggle to confidently predict where inflation will go in coming years.
A principal component analysis (PCA) sheds some light on the underlying drivers of G4 inflation. In the early 1990s, the first principal component (PC1) of G4 headline and core inflation explained around 90% of the variation over time and across countries. The two moved in tandem through the 1990s and 2000s but diverged over the last 10 years. In other words, the core inflation dynamics across G4 countries have become less inter-connected.
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