A very interesting blog post from a good economics blog, Zero Hedge.
Although contemporaneous estimates of output gaps are somewhat elusive, the broad picture is clear: a growing portion of the global economy is facing inflation risks and the bulk of developed economies is no longer in the deflation danger zone. This uneven dynamic distribution matters a lot for investors, who need to make up their mind about inflation. One key lesson from the past cycle is that price movements have a larger common component than in previous times; call it the globalisation factor. Matteo Ciccarelli and Benoît Mojon estimated that “(inflation rates of) OECD countries have a common factor that alone accounts for nearly 70% of their variance” (ECB working paper, October 2005), a finding that is consistent with later research by Haroon Mumtaz and Paolo Surico (Bank of England working paper, February 2008). In such a world, the fact that China, India and Brazil have entered into the inflation risk zone matters more than Spain, Ireland and Greece being on the brink of deflation.