Inflation tales: the heterogeneous price effects from current account dynamics

• Links current account dynamics to inflation in a large panel of advanced and emerging economies. • Shows inflation effects differ by imbalance source: trade, income, or financial flows. • Finds reversals are disinflationary in advanced economies but inflationary in EMs. • Debt-financed deficits generate stronger inflation than equity-financed ones. • Uses local projections and alternative inflation measures to ensure robust results. This paper examines the impact of current account balances on energy, headline, and core inflation across developed and developing economies from 1980 to 2023. Using Panel OLS fixed effects, Panel-IV 2SLS and Panel Vector Autoregressive models, we find that an improvement in the current account consistently leads to lower inflation, with heterogeneous effects across inflation components, even when controlling for monetary policy. Our analysis also explores regional differences and contrasts the periods before and after the 2008 subprime crisis, revealing that current account surpluses had a stronger deflationary effect in the more recent period. There is also a negative link between cyclical unemployment and inflation supporting the traditional Phillips curve perspective. For net fuel-importing countries, the current account balance exhibits negative and statistically significant coefficients to both energy inflation and headline inflation. These results suggest that policies aimed at improving current account balances, particularly in energy-importing countries, could help mitigate inflationary pressures.