The Historical Role of Energy in UK Inflation and Productivity and Implications for Price Inflation in 2022

Jennifer Castle, David Hendry and Andrew Martinez

No 2022-001, Working Papers from The George Washington University, Department of Economics, H. O. Stekler Research Program on Forecasting

Abstract: We model UK price and wage inflation, productivity and unemployment over a century and a half of data, selecting dynamics, relevant variables, non-linearities and location and trend shifts using indicator saturation estimation. The four congruent econometric equations highlight complex interacting empirical relations. The production function reveals a major role for energy inputs additional to capital and labour, and although the price inflation equation shows a small direct impact of energy prices, the substantial rise in oil and gas prices seen by mid-2022 contribute half of the increase in price inflation. We find empirical evidence for non-linear adjustments of real wages to inflation: a wage-price spiral kicks in when inflation exceeds about 6–8% p.a. We also find an additional non-linear reaction to unemployment, consistent with involuntary unemployment. A reduction in energy availability simultaneously reduces output and exacerbates inflation.

Keywords: Energy; Inflation; Location Shifts; Indicator Saturation Estimation; Equilibrium Correction. (search for similar items in EconPapers)
JEL-codes: C22 C51 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2022-09
New Economics Papers: this item is included in nep-ene, nep-his and nep-mon
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https://www2.gwu.edu/~forcpgm/2022-001.pdf First version, 2022 (application/pdf)

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Working Paper: The historical role of energy in UK inflation and productivity and implications for price inflation in 2022 (2022)
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