Inflation and consumption of nontradable goods: Global implications from regional analyses

This paper analyzes empirically the regional inflation from the demand-side using consumption data on goods and services as well as the geographical location of regions in Japan. The service sector has been expanding rapidly over recent decades in terms of its contribution to the total economic activity in advanced countries including Japan. After providing a theoretical relationship between regional inflation and consumption of nontradable goods, we confirm the interaction between the inflation rates across regions and find evidence that different consumption patterns of services across regions explain regional inflation in Japan.