Whose Inflation Is It Anyway? The Inflation Spillovers Between The Euro Area and Small Open Economies

For the last two years inflation has been systematically falling across countries in the European Union and lately it exhibits rising deflationary pressures. Recent studies suggest that apart from global determinants influencing broad inflation measures, e.g. plummeting commodity prices, core inflation components are subjected to the rising influence of globalization. Our analysis focuses on two aspects: the extent of the HICP components infected with deflation and the spillovers of headline, core, non-energy goods as well as services inflation between the euro area and distinguished small open economies. In order to answer the question of inflation broadness we calculate the percentages of HICP components which dynamics fall into certain thresholds and introduce a simple measure - the Discrepancy Index showing the relative strength of deflationary and inflationary groups. To address the problem of quantifying the inflation spillovers across distinguished economies we use the Diebold and Yilmaz (2012) spillover indices. Results indicate that the share of deflationary groups for most countries has been consistently rising since 2010 with the Discrepancy Index approximating its all-time lows in the fourth quarter of 2014. Simultaneously we show that the spillover index for non-energy industrial goods and services inflation has lately risen considerably with the measure for headline inflation remaining elevated and for core inflation dropping. The euro area remains a net inflation transmitter in most cases