The global component of headline and core inflation in emerging market economies and its ability to improve forecasting performance

Literature has documented the synchronization of inflation across countries and the forecasting power of global inflation in advanced economies. Using the case of ten emerging market economies for the period 2002-2019, we show that global factors strongly influence both headline and core inflation in these countries, suggesting that the drivers of the common inflation variation go beyond the movements of international commodity prices. We document that incorporating the global inflation factor into forecasts improves their performance for headline inflation among emerging markets. While this predictive potential can stem from the global inflation factor's correlation with observable determinants of inflation across countries, we argue that it also contains additional information of determinants that have been overlooked or are difficult to measure. By improving inflation forecasting ability through a parsimonious model, the method proposed can enhance data-driven policy-making.