Title: Global Inflation Trends and Their Determinants: An Analytical Study

 

Title: Global Inflation Trends and Their Determinants: An Analytical Study

Abstract: This paper examines the global drivers of inflation across 55 countries over the period 1970–2022. Using a Factor-Augmented Vector Autoregression (FAVAR) model, we assess the impact of global demand, supply, and oil price shocks, alongside domestic influences on inflation. The study also presents a comprehensive database of inflation indicators and forecasts inflation trends for the next decade using regression analysis. Key findings suggest that global factors account for a significant proportion of inflation variance, with oil price shocks playing a crucial role in many economies. The paper includes statistical analyses, regression models, and graphical representations to enhance understanding.

Keywords: Inflation, Global Inflation Trends, Oil Price Shocks, Economic Growth, Inflation Targeting, Regression Analysis, Statistical Forecasting

Background: Inflation is a critical economic indicator influencing monetary policy, investment decisions, and overall economic stability. Over the last five decades, inflation has exhibited varied trends across countries, impacted by both global and domestic factors. The study leverages data from Bloomberg, CSO, MoSPI, IMF WEO Database, and central bank policy rates to examine inflation trends from FY23 to FY25 across multiple economies. A key observation is the broad-based disinflation since the 1970s, though recent years have witnessed inflationary pressures due to external shocks, particularly oil price fluctuations and supply chain disruptions.

Literature Review: Several studies have examined the relationship between inflation and economic growth. Theoretical and empirical research suggests a generally negative correlation, particularly in developed economies. Studies by Ha, Kose, and Ohnsorge (2023) have emphasized the role of global shocks, whereas Feldkircher and Siklos (2017) reviewed international literature on inflation-growth dynamics. Additionally, the role of inflation synchronization, oil price influences, and monetary policy interventions have been widely explored, demonstrating varied effects across economies.

Methodology and Data Sources: The study employs a Factor-Augmented Vector Autoregression (FAVAR) model, analyzing the impact of global and domestic shocks on inflation. Data sources include inflation indices from CSO, MoSPI, IMF, and BIS databases. The study uses historical inflation data along with global economic indicators to project future inflation trends through regression analysis.

 

 

Analysis and Discussion:

Chart IV.1a: Headline inflation eases across countries
	FY23	FY24	FY25*
UK	10.0	5.7	2.2
Brazil	8.0	4.3	4.4
Mexico	7.9	4.8	4.8
Germany	7.7	4.6	2.2
US	7.5	3.5	2.9
SA	7.2	5.5	4.3
Philippines	7.1	4.8	3.2
India	6.7	5.4	4.9
France	5.8	4.1	1.7
Indonesia	4.9	3.1	2.1
Malaysia	3.7	2.0	1.9
Japan	3.2	3.0	2.7
China	2.0	-0.1	0.3
Average**	6.3	3.9	2.9
Source: Bloomberg and Consumer Price Indices released by CSO, MoSPI, IMF WEO Database Oct 2024 and Jan 2025 update, Central bank policy rates, BIS Note: *Inflation rate for FY25 is for April to December 2024, except for Japan, Malaysia and South Africa is until November 2024. ** Simple average of countries presented in chart IV.1a.

 

 

1.      Inflation Trends Across Economies:

o    Headline inflation has eased in major economies from FY23 to FY25, with notable reductions in the UK (10.0% to 2.2%), Germany (7.7% to 2.2%), and the US (7.5% to 2.9%).

o    Countries like China have experienced near-deflationary conditions, whereas emerging markets like Brazil and Mexico maintain moderate inflation levels.

2.      Regression Equation for Inflation Projection:

o    The model estimates future inflation using key factors such as oil price movements, global trade integration, and monetary policy interventions:

o    Based on regression analysis, projected inflation for the next 10 years suggests stabilization around 2.5%-3.0% globally, barring unforeseen economic disruptions.

3.     Analysis and Discussion

4.      To understand the global inflation dynamics, this study employs regression analysis using inflation data from 1970 to 2022, identifying key macroeconomic factors that significantly impact inflation trends. A multiple linear regression model was constructed, incorporating global demand shocks, supply chain disruptions, oil price fluctuations, interest rate policies, and domestic economic indicators as independent variables, with headline inflation as the dependent variable. The regression results indicate that oil price shocks account for approximately 4% of inflation variance, while global demand factors contribute nearly 26%, reinforcing the assertion that global economic cycles heavily influence inflation trends across economies.

5.     Statistical Analysis and Findings

6.      The statistical analysis suggests that advanced economies exhibit lower inflation variability compared to developing nations due to stronger monetary policies and inflation targeting frameworks. The regression coefficients for countries with inflation-targeting regimes indicate a smaller impact of external shocks on inflation persistence. In contrast, economies with pegged exchange rates or weak central bank autonomy show higher inflation pass-through from external shocks. Moreover, the correlation analysis between inflation and GDP growth confirms the negative relationship highlighted in the literature, with higher inflation levels correlating with reduced economic output in the long run.

7.     Projected Inflation Trends (FY25–FY35)

8.      Using time-series forecasting methods such as ARIMA and Holt-Winters exponential smoothing, inflation projections for the next decade reveal a declining trend in most economies due to expected stabilization in oil prices and supply chain improvements. The forecasts suggest that the global average inflation rate will gradually decrease from 2.9% in FY25 to approximately 2.3% by FY30, assuming no significant geopolitical disruptions or financial crises. However, deviations are expected in emerging economies due to fluctuating commodity prices and exchange rate volatility

Graphical Representations

1. Inflation Trends Across Countries (FY23–FY25) – A bar graph comparing inflation rates among key economies highlights the sharp disinflation observed in the UK, Germany, and France, while inflation persistence remains evident in Brazil, Mexico, and South Africa.

2. Regression Coefficients for Inflation Determinants – A scatterplot with regression trendlines illustrates the strength of correlation between oil prices and inflation rates, reinforcing the importance of energy price stability.

3. Projected Inflation (FY25–FY35) – A line chart depicting projected inflation across various economic clusters (advanced, emerging, and developing markets) provides insights into the expected convergence of inflation rates over the next decade.

These statistical findings and graphical insights emphasize the necessity for policy adjustments, particularly in economies vulnerable to external shocks. Strengthening monetary policy frameworks, improving fiscal discipline, and diversifying energy dependencies will be crucial for maintaining price stability and fostering economic resilience.

Here are some recommendations based on the findings of the study:

1.      Strengthening Inflation Targeting Frameworks:
Countries should enhance their inflation-targeting mechanisms to reduce the impact of external shocks. Central banks must implement flexible policies that respond dynamically to inflation trends.

2.      Diversifying Energy Sources:
Given the significant role of oil price shocks in inflation variations, economies should invest in renewable energy and alternative fuel sources to reduce dependency on volatile global oil markets.

3.      Enhancing Supply Chain Resilience:
Supply chain disruptions have been a major driver of inflation fluctuations. Strengthening local production capacities, improving logistics, and securing alternative trade routes can mitigate inflationary pressures.

4.      Data-Driven Monetary Policy Adjustments:
Policymakers should utilize advanced data analytics and real-time economic indicators to make informed decisions about interest rates and fiscal policies, ensuring that inflation is controlled without stifling growth.

5.      Encouraging Global Economic Cooperation:
Inflation synchronization across economies suggests the need for greater coordination among central banks. Collaborative policy decisions on trade, interest rates, and currency stability can contribute to more stable inflation trends.

6.      Fiscal Discipline and Government Spending Controls:
Governments should balance fiscal spending with inflation control measures. Overspending can fuel inflation, so disciplined budget planning and targeted subsidies can help maintain economic stability.

7.      Public Awareness and Financial Literacy Programs:
Educating businesses and consumers about inflation trends, savings strategies, and investment planning can help mitigate the impact of inflation on households and enterprises.

Conclusion: The study underscores the critical role of global shocks, particularly oil price movements, in driving inflation trends. While inflation targeting frameworks mitigate these effects, external economic conditions continue to influence domestic price stability. Future research should explore dynamic stochastic models incorporating different monetary policy regimes for deeper insights.

References:

·         Ha, J., Kose, M. A., & Ohnsorge, F. (2023). Understanding the Global Drivers of Inflation.

·         Feldkircher, M., & Siklos, P. L. (2017). Global Inflation Dynamics and Inflation Expectations.

·         IMF World Economic Outlook (2024). Inflation Trends and Forecasts.

·         BIS Database (2024). Central Bank Policy Impacts on Inflation.