Central bankers aiming at price stability have had a rather easy life in recent years. One of the features characterizing the global macro-economy has been low and stable inflation. Several factors contributed to this success, but an important one, we believe, is globalization. There are several ways in which globalization can tame the inflation process. First, cross-border competition erodes monopoly rents in product and labour markets, putting downward pressure on wages and prices. Second, globalisation fosters efficiency gains, as firms relocate part of their activity abroad – the so-called “production unbundling”, that amounts to a positive supply shock leading to lower prices as well as more output. Third, consumer prices are kept in check by low-cost imports from emerging countries, mainly in Eastern Asia. Low labor costs in countries like China, coupled with a stable exchange rate, effectively provide an anchor to global inflation.
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