This paper analyzes how global factors, which are gaining increasing influence in the course of the globalization of the world economy, are transmitted to inflation. In particular, the competition channel, which is becoming prominent as the background to the recent global low inflation and synchronization, is observed in order to conduct an empirical analysis of the effects of global factors’ transmission to domestic inflation.

  In theory, the effects of global factors on domestic inflation are spread through the trade channel and the production factor channel as well as the competition channel. Among them, the competition channel is the process whereby changes in the prices of foreign alternatives, by altering the relative prices of domestic goods (domestic goods prices/foreign goods prices), are consequently transmitted to these domestic prices, even if not passing through the trade channel as, say, physical imports. The competition channel has been gaining attention as the underlying factor explaning the low global inflation in a situation characterized by a lack of aggregate demand.
  With this in mind, an empirical analysis is conducted in this paper of the effects of global factors on domestic prices by examining how domestic tradable goods prices respond to changes in the relative prices transmitted to them. According to the results of the analysis, a rise in the relative prices of domestic tradable goods resulting from a fall in the prices of foreign goods that are in competition with them puts downward pressure on their prices. A 1% increase in relative prices is estimated to reduce the rate of increase in domestic tradable goods prices by 0.15 of a percentage point.
  Meanwhile, changes in relative prices are found to have had an even larger impact on domestic tradable goods prices since the global financial crisis. When these estimation results are applied to overall consumer prices, the rise in relative prices is analyzed as having lowered consumer price inflation by an average of 0.2 of a percentage point over the last two years, suggesting that the recent low inflation is attributable in part to global factors whose influence is transmitted through the competition channel. In addition, the transmission effects of relative prices when domestic prices are on the rise are estimated to be approximately twice as large as when they are falling, suggesting that falls in the prices of foreign alternatives, rather than rises, elicit a more sensitive response.
  This being the case, given the increasingly close relationship between global factors and domestic inflation, careful consideration should be given to the effects of the transmission of global factors to prices in order to enhance the accuracy of price forecasts and carry out monetary policy efficiently. Moreover, as the competition channel is expected to strengthen still further as the range of trading methods available such as direct purchases from overseas expands thanks to information and communication technology development, while there is a continuing trend toward the
diversification of the areas of trade opened up so as to also embrace services, the close examination and analysis of the evolution of global factors and their impact is also required.