LONDON (MNI) – A working paper from the Bank of England finds that
the rise of the BRIC economies may actually be helping to reduce
inflation in G7 economies rather than fueling it.

The paper conducts model-based experiments on the impact of the
rising productivity in Brazil, Russia, India and China. One widespread
view is the emergence of these economies is adding to global inflation
through higher demand for oil and a range of commodities.

The BOE paper, however, suggests the reverse may be true although
it adds taht further work needs to be done on the oil demand of the
BRICs. The question of whether the global economy is fueling domestic
inflation is a hot topic for the BOE’s Monetary Policy Committee.

The paper looks at the “tailwinds” of reduced inflationary pressure
from the BRICs and the “headwinds” of increased inflationary pressure
via commodity price pressures.

“In our baseline calibration, it turns out that the
tailwinds outweigh the headwinds and home inflation is reduced as a
result of the shock, suggesting that the rise of the BRIC economies
acted to help keep inflation low in the developed world,” the paper
states.

It adds a number of caveats, noting that is not denying that “at
the time of writing the recent rises in non-agricultural commodity
prices are unconnected with the resumption of growth in emerging
economies.”

The model also shows a number of conditions have to be met for the
BRICs to help bring down inflation in G7 countries.

“We find that the tailwinds effect, lowering inflation in the home
economy, dominates the headwinds effect only as long as there is scope
for borrowing and lending across countries and the foreign country’s
production is not too oil intensive. This suggests that we need to
examine the extent to which the BRIC economies use oil if we are to
obtain a final answer to our question,” the authors state.

The paper was written by Anna Lipinska and Stephen Millard, both
economists at the BOE.

–London newsroom 0044 20 7862 7491; email: drobinson@marketnews.com

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