Changes in Inflation Dynamics in Korea: Global Factor, Country Factor and Their Propagation*

Abstract This study examines the influence of global and country factors on inflation movements in Korea using a multi‐level factor model. Our results indicate that country factors showed a more pronounced alignment with inflation in Korea up to the mid‐2000s, having particularly strong impacts around the Asian financial crisis. Beyond the mid‐2000s, global factors played a more influential role in shaping inflation. This increased influence of global factors on inflation became particularly apparent during the notable inflationary surge following the COVID‐19 pandemic. We construct structural models to identify global and country shocks and find that the effect of global shocks persists for a longer period, whereas the immediate impact of country shocks is more pronounced. Global shocks have a greater influence on producer price index and import price index inflation compared to consumer price index (CPI) or core CPI inflation. We further find that energy prices closely correlate with global factors, while exchange rates are highly correlated with country factors in Korea.