What Common Factors are Driving Inflation in CEE Countries?

Abstract

In this paper, we analyse the sources of time variation in consumer inflation across ten Central and Eastern European (CEE) countries and five sectors (durables, semidurables, non-durables, food, and services) in the period 2001-2013. With a multi-level factor model we decompose product-level HICP inflation rates into the following components: CEE region wide, sector, country, country-sector, and idiosyncratic. The outcomes indicate that region-wide and country specific components of inflation are more persistent than sector and product-level components, which is in line with similar studies for core EU countries. Two region-wide factors explain about 17% of variance in monthly price changes, whereas the other common components explain below 10% each. The results are at odds with empirical evidence on the importance of sectoral price shocks in developed economies and the volatility-persistence puzzle. This difference may be related to the conclusion that the first region-wide factor is associated with common disinflationary processes that occurred in CEE economies in 2000s, whereas the second one reveals significant correlations with global factors, especially commodity prices and euro area price developments.

Keywords: product-level inflation, CEE economies, multi-level factor model

JEL Classification: C38, C55, E31, E52, F62