studies use considerably smaller and more homogeneous country samples than the sample used in this paper. This helps to explain why, in their studies, the global factors account for larger shares of inflation variation (Figure 1). Nevertheless, the shares presented here are within the range— although toward the low end—of those reported in the literature.

Another group of studies focus on the evolution of global inflation synchronization over time. Neely and Rapach (2011) extract a global factor and seven regional factors from CPI inflation in 64 mostly advanced economies during 1950-2009. They find that the global factor, on average, accounted for 35 percent of inflation variance, and the regional factors accounted for 16 percent— and these shares have risen substantially since the 1980s. Mumtaz and Surico (2012) estimate global and regional factors from 164 inflation indicators for 13 OECD economies during 19612004. They find that, in most countries, the degree of inflation synchronization has strengthened since the 1980s. Mumtaz, Simonelli, and Surico (2011) focus on an unbalanced panel of 36 countries between 1860 and 2007. They show that the share of inflation variation due to the global factor has grown since 1985.

Finally, sectoral, goods, or subnational factor decompositions have been used to identify more granular patterns in inflation synchronization. Monacelli and Sala (2009) estimate the contributions of a global factor to inflation variance in a large cross-section of sectoral price data (948 CPI products) for four OECD countries during 1991-2004. They find that, on average, the global factor explains 15-30 percent of the variation in disaggregated consumer price inflation, the share being higher in sectors with greater trade openness. Auer, Levchenko, and Sauré (2017) show, for disaggregated producer price index (PPI) inflation for 30 mostly OECD countries and 17 sectors during 1995 to 2011, that the global factor explains nearly half the fluctuations in PPI inflation in the average economy. They argue that this PPI synchronization across countries is driven primarily by common sectoral shocks and amplified by input-output linkages.

In Section 2, we introduce the dynamic factor model to capture inflation synchronization. Section 3 documents the evolution of global and group-specific factors that have driven the increased synchronization of inflation rates and compares the extent of inflation synchronization with that of business cycles. Section 4 explores the synchronization across different measures of inflation, including headline and core consumer price inflation, and measures based on producer prices and import prices. Section 5 concludes with a brief summary, discussion of policy implications, and future research directions.

# 2. Methodology and Data

# 2.1. Methodology

A dynamic factor model is employed to decompose inflation in each country into a global inflation factor that is shared across all countries, an advanced economy or EMDE factor that is shared within the respective groups (that is, two group-specific inflation factors), and an idiosyncratic inflation factor that is unique to each individual country.<sup>6</sup> Dynamic factor models are designed to extract a few unobservable common elements from a large number of (observable) variables. Thus, the model allows a parsimonious representation of the data in terms of the unobservable common

> 6 These types of models are used extensively to analyze global business and financial cycles (Kose, Otrok, and Whiteman 2008; Kose, Otrok, and Prasad 2012; Ha et al. 2017; Neely and Rapach 2011; Mumtaz and Surico 2012).

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