Decomposing the rate of inflation: Forecast-based connectedness among CPI components

This study investigates the domestic transmission of inflation by examining how price dynamics interact within the Consumer Price Index (CPI) in the US, the UK, and Japan over the period January 1988 (January 1993 for the US) to March 2025. Using a time-varying parameter vector autoregression (TVP-VAR) connectedness framework, we quantify the extent and evolution of inflation interdependencies across disaggregated price series. The results show that inflation is driven not only by external shocks and policy conditions but also by endogenous interactions within the price system. Inflation transmission remains moderate on average but intensifies during periods of elevated inflation, indicating stronger propagation of price pressures. Fiscal interventions, such as Japan’s consumption tax increases, generate sharp but short-lived increases in transmission. Finally, we document a decline in inflation transmission over time, consistent with increased global integration and trade openness. These findings demonstrate that aggregate inflation measures overlook important internal dynamics.