Since the mid-1980s, there has been a weakening of the correlation between inflation and output in advanced countries. Why? One of the prime suspects is globalisation. Aside from the well-known effects of lower wages abroad and cheaper imported goods, globalisation may also encourage concentration at home and allow the most efficient domestic firms to grow larger by accessing international markets. In addition, large companies have room to actively adjust their markup in order to keep relative prices low and preserve their market share. This strategic behaviour may have dampened the response of inflation to domestic slack over the last 30 years even if the process may have stabilised over the last decade.
Updated on: 06/29/2017 16:01