By Jennifer Greenslade and Stephen Millard of the Bank’s Structural Economic Analysis Division and Chris Peacock of the Bank’s International Finance Division.
This article discusses how globalisation may influence the way inflation moves over the business cycle in the United Kingdom. Globalisation may do this by affecting how costs respond to changes in economic activity in the United Kingdom or by affecting how inflation responds to changes in costs. Some evidence is presented that suggests globalisation may have led to an increase in the importance of import prices relative to domestic economic activity in explaining changes in firms' costs. But, once this has been taken into account, the response of inflation to movements in costs does not appear to have changed over recent years. This suggests it is increasingly important to understand what drives movements in import prices, particularly given the rapid rise in global food and energy prices over the past year.