Inflation has gone global - that's the conclusion of a growing number of economists who say world capacity pressures now have more influence on a country's inflation than factors closer to home.
Five years of the fastest world growth since the 1960s mean a dwindling amount of global spare capacity is left, so central banks must look more beyond their own borders if they want to keep one step ahead of inflation, researchers say.
"There has been mounting evidence that the inflation process has been changing," say Claudio Borio and Andrew Filardo from the Bank for International Settlements in a new research paper.
"Global factors appear to have supplanted the role of domestic measures of economic slack." The idea that globalisation may be about to push up inflation, rather than pull it down, flies in the face of much conventional wisdom. The entry of China and other Asian countries into the world economy was supposed to ensure a near-limitless supply of cheap labour and manufactured goods. In fact, an Organisation for Economic Co-operation and Development study estimates that their net impact on inflation is small, due to competition for raw materials.
Across the OECD's 30 members, annual inflation between 2000 and 2005 was at most 0.2 percentage points lower - and possibly no different - than if globalisation had not occurred.
While closer global trading links reduced the cost of goods and services by 0.1-0.3 percentage points, greater global demand caused a counterbalancing 0.1 percent boost to consumers' energy and commodity costs, the study said.
Bundesbank President Axel Weber, citing the research in a recent speech, said the effect of globalisation was more to change the relation of prices within a consumer's shopping basket than to cut the cost at the check-out. The Bank of England's latest Quarterly Bulletin made a similar point.
What has changed, though, is the warning signs central banks need to look for to spot inflation on the horizon. The OECD research, and the BIS paper by Borio and Filardo, point to measures of global spare capacity as a better guide to inflation than national indicators economists traditionally focus on. However, useful measures of global spare capacity are hard to come by.
Working out how fast an economy can grow without sparking inflation, known as its trend or potential growth rate, is tricky enough for national economies let alone for the whole world.
Difficulties with these estimates are amplified by the fast pace of change in the world economy. "If you look at long-term averages, the risk is that you look too much into the past. If you are very forward looking, you run the risk of interpreting things in the wrong way," said Goldman Sachs's Perez de Azpillaga.
Those problems aside, the figures in the International Monetary Fund's latest World Economic Outlook point, at face value, to increasing inflation pressures. Global spare capacity is forecast to shrink from 0.4 percent of GDP in 2006 to just 0.1 percent by 2008.
"After four years of strong global growth and output gaps closing in emerging markets too, there is at least a possibility that the dampening effect of global competition on price- and wage-setting behaviour may start to moderate," the IMF said. While the IMF's estimates show a bit more spare capacity than at the same point in the last business cycle, other economists, who calculate the gap between actual and potential output slightly differently, think there are already capacity shortages.
"Globally our output gap has gone positive and we have it staying positive throughout our forecast horizon through to the end of 2008," said Maxine Koster, global economist at Credit Suisse. "Rates will continue to normalise in countries where they haven't normalised yet. In some countries it might start to move in a restrictive direction."
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