While on the surface the response to the major shocks of the past decade has been a common rates cycle (Chart 3 – bottom panel), the reality has been an unprecedented broadening of monetary policy instruments and increased policy divergence. With the end of additional QE, policy in the US and UK has stopped easing and there is the prospect – when conditions warrant – of tightening. The start of normalisation is set against determined easing of policy in the euro area and Japan as well as now across many Emerging Market Economies including China. III. Common linkages  Global inflation dynamics are driven by common global linkages through commodities, trade and finance. Commodities The combination of the oil shock and the absence of credible monetary policy frameworks led to high and sustained correlations of headline inflation in the 1970s. And even though the oil intensity of production has since fallen, commodity price shocks remain an important determinant of the global inflation landscape today. 4 Energy and food prices contributed around three percentage points to the global inflation spike at the onset of the crisis and are currently weighing on global inflation by around ½ percentage point (Chart 4). 5 However, in terms of policy credibility, the contrast with the 1970s is stark. As noted, correlations between core inflation rates today remain low; and with credible monetary regimes anchoring inflation expectations, policymakers can look through the one-off price level effects of oil shocks.

16 The pass-through of exchange rate changes through the supply chain into UK CPI inflation is a protracted process, indicative of rich pricing frictions in the market for imported  13  See the discussion in Greenslade, J, Millard, S and Peacock, C (2008), “How has globalisation affected inflation dynamics in the United Kingdom?”, Bank of England Quarterly Bulletin, Q3. Peacock and Baumann (2008) find evidence of a flattening of the UK Phillips Curve since the mid 1980s, conditional on treating the UK as a closed economy. When import prices are allowed to enter firms’ costs, however, the authors find no change in the Phillips curve slope comparing 1965-2007 and 1985-2007. Peacock, C and Baumann, U (2008), “Globalisation, import prices and inflation dynamics”, Bank of England Working Paper No. 359. Groen and Mumtaz (2008) likewise find little evidence in changes in the structural parameters of UK Phillips Curves. Groen, JJJ and Mumtaz, H (2008), “Investigating the structural stability of the Phillips Curve relationship”, Bank of England Working Paper No. 350. 14  Source: Richard Freeman (2006), ‘The Great Doubling: The Challenge of the New Global Labor Market http://scholar.harvard.edu/freeman/publications/great-doubling-challenge-new-global-labor-market. 15  These measures weight countries by their share of UK-imports, and demonstrate the negative price pressure facing the UK today from slack in our trading partners. 16  Gopinath, G (2015), “The International Price System”, mimeo at this Symposium. 4  BIS central bankers’ speeches  intermediate and final goods. These effects span the policy horizon, and therefore affect the appropriate stance of monetary policy.