The current surge in commodity prices, including food more recently, which is resulting, in particular, from supply being unable to match higher demand from emerging markets, reminds us that globalisation can also lead to upside risks to world inflation. Furthermore, global events could become so important in driving inflation that they affect the conduct of monetary policy.
For instance, it could be that the traditional links between inflation and “domestic” variables – particularly the level of unemployment – have become obsolete in a world where emerging Asia as well as previous communist countries provide such a large amount of labour at low cost.