2  All speeches are available online at www.bankofengland.co.uk/speeches  2  Chart 1: Global Price Phillips Curve? Notes: Average world output gap and global core CPI inflation (PPP-weighted). Sources: CEIC, IMF, ONS, Thomson Reuters Datastream and Bank calculations. Chart 2: Price and Wage Phillips curves have flattened throughout globalisation  Source: BIS 87th Annual Report. With correlations of headline CPI inflation rates as elevated today as during the first oil shock (Chart 3a), some contend that global forces have become dominant – a conviction reinforced by the ‘missing disinflations’ in the wake of the global financial crisis  2,3  and by the current series of wage puzzles in  2  See, for example, Chapter 3 of the IMF’s WEO April 2013, ‘The dog that didn’t bark: has inflation been muzzled or was it just sleeping?’. 3 One explanation put forward for this, unrelated to globalisation, is that companies facing liquidity constraints maintained prices at higher levels than they would otherwise have done in order to preserve cash flows and remain in operation. See Gilchrist, S, Schoenle, R, Sim, J and Zakrajšek, E (2017), ‘Inflation dynamics during the financial crisis’, American Economic Review, Vol. 107, No. 3, pages 3  All speeches are available online at www.bankofengland.co.uk/speeches  3  4  advanced economies. There are even suggestions that monetary policy frameworks should be overhauled – potentially lowering the inflation target – in response globalisation’s growing impact.
47  Chart 13: UK increasingly integrated in onward EU supply chains  Notes: The chart shows how much of the value added by the UK in exports to the EU / other countries that is subsequently re-exported. Sources: Credit Suisse and World Input-Output Database (2016 release). Retaining some of these positions may be challenging as evidence indicates that trade in intermediates appears to be more sensitive to trade costs such as tariffs. Given that proximity also appears to be more important for trade in intermediates than for trade in final goods,  48  international substitutes for European  buyers of UK intermediates, as well as European suppliers of intermediates into UK supply chains, may be more difficult to source. These effects and the experience of the past 30 years prompt the question: if globalisation is disinflationary, won’t Brexit be inflationary? Certainly, this process of de-integration can be expected to steepen the Phillips Curve given disruptions to in-bound value chains from Europe and reduced contestability of UK labour and product markets. In addition, the reallocation of capital to suit new trade arrangements will take time, weighing on growth of the economy’s supply capacity while it proceeds. Moreover, any increase in tariffs on UK imports, or increases in the cost of imports due to broader access restrictions, would cause the Phillips Curve to shift up temporarily as those higher costs are passed through the supply chain. These inflationary effects may be reinforced by developments in the labour market.