Inflation in advanced and many emerging market economies has remained remarkably subdued over the past two years despite a significant rise in commodity prices, strong growth, and a broadly accommodating monetary policy stance in the major currency areas. Is this situation sustainable or does it foreshadow unwelcome inflation surprises in the near future? Some analysts have argued that low and stable inflation reflects more intense global competition, which prevents firms from raising prices and puts downward pressures on wages in many sectors.1 If so, and given that lower-cost producers in emerging markets and developing countries will continue to integrate into the global trading system, these forces are likely to ensure low inflation in the foreseeable future, reminiscent of the secular deflation associated with broad productivity increases during the classical gold standard in the late nineteenth century. However, such views are not universally shared. Other analysts have offered alternative explanations for the recent inflation performance, including improved monetary policy credibility, broad productivity gains of uncertain duration, or cyclical conditions.2

Globalization and Inflation