Mind the gap: city-level inflation synchronization

Area of Science:

• Economics
• Econometrics
• Spatial Analysis

Background:

• Global disinflationary trends have been challenged by post-pandemic price increases, renewing interest in inflation dynamics.
• Understanding inflation synchronicity is crucial for economic policy and forecasting.

Purpose of the Study:

• To investigate the spatial synchronicity of inflation at the city level in Lithuania.
• To analyze the temporal evolution and heterogeneity of inflation co-movement between Lithuanian cities.

Main Methods:

• Utilized disaggregated monthly inflation data for Lithuanian cities from 2000-2021.
• Employed the instantaneous quasi-correlation approach to estimate inflation rate co-movement.
• Analyzed subcomponent inflation heterogeneity and temporal synchronization changes.

Main Results:

• Instantaneous quasi-correlation indicates significantly weaker inflation synchronicity between cities than simple correlation analysis suggests.
• Substantial heterogeneity exists in the co-movement of inflation subcomponents across city pairs.
• Inflation synchronization levels have changed significantly over time, influenced by major economic events.

Conclusions:

• The spatial synchronization of city-level inflation in Lithuania is less pronounced than commonly assumed.
• Heterogeneity and temporal dynamics in inflation co-movement highlight the need for nuanced spatial economic analysis.
• Economic shocks and policy changes demonstrably alter inflation synchronicity patterns within a country.