A trendy approach to UK inflation dynamics

Kristin Forbes, Lewis Kirkham () and Konstantinos Theodoridis
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Lewis Kirkham: Monetary Policy Committee Unit, Bank of England

No 49, Discussion Papers from Monetary Policy Committee Unit, Bank of England

Abstract: This paper uses a ‘trendy’ approach to understand UK inflation dynamics. It focuses on the time series to isolate a low-frequency and slow-moving component of inflation (the trend) from deviations around this trend. We find that this slow-moving trend explains a substantial share of UK inflation dynamics. International prices are significantly correlated with the short-term cyclical movements in inflation around its trend, and the exchange rate is significantly correlated with movements in the slow-moving, persistent trend. Other variables emphasized in standard inflation models — such as slack and inflation expectations — may also play some role, but their significance varies and the magnitude of their effects is substantially smaller than for commodity prices and the exchange rate. These results highlight the sensitivity of UK inflation dynamics to events in the rest of the world. They also provide guidance on when deviations of inflation from target are more likely to be temporary, and when (and how quickly) a monetary policy response is appropriate.

Keywords: UK; inflation; UCSV; exchange rate; slack; inflation expectations; monetary policy (search for similar items in EconPapers)
JEL-codes: E31 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2017-06-16
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (9)

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Related works:
Journal Article: A Trendy Approach to UK Inflation Dynamics (2021)
Working Paper: A Trendy Approach to UK Inflation Dynamics (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:mpc:wpaper:0049

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