What Common Factors are Driving Inflation in CEE Countries?

Abstract

In this paper, we analyse the sources of time variation in consumer inflation across ten Central and Eastern European (CEE) countries and five sectors (durables, semidurables, non-durables, food, and services) in the period 2001-2013. With a multi-level factor model we decompose product-level HICP inflation rates into CEE region-wide, sector, country, country-sector specific and idiosyncratic components. The outcomes indicate that two region-wide factors explain about 17% of variance in monthly price changes, whereas the other common components explain below 10% each. The regionwide and country specific components are persistent in opposition to sector and product-level components, which is generally in line with similar studies for core EU countries. Surprisingly, CEE-wide component is relatively more important and as volatile than lower-level components, which is at odds with the results on the importance of sectoral prices. This difference may be related to the conclusion that the first CEE-wide factor is associated with common disinflationary processes that occurred in CEE countries on their road to the European Union, whereas the second one reveals significant correlations with global factors, especially commodity prices and euro area price developments.