What Lies Beneath: What Can Disaggregated Data Tell Us about the Behaviour of Prices?
University of London - School of Sciences
CCBS, Bank of England
University of Birmingham
March 20, 2009
Bank of England Working Paper No. 364
This paper uses a factor-augmented vector autoregression technique to examine the role that macroeconomic and sector-specific factors play in UK price fluctuations at the aggregate and disaggregated levels. Macroeconomic factors are less important for disaggregated prices than aggregate ones. There also appears to be significant aggregation bias - the persistence of aggregate inflation series is much higher than the underlying persistence across the range of disaggregated price series. Our results suggest that monetary policy affects relative prices in the short to medium term, and that the degree of competition within industries plays a role in determining pricing behaviour.
Number of Pages in PDF File: 32
Keywords: Inflation persistence, disaggregation, principal components
JEL Classification: C3, D4, E31, E52
Date posted: March 21, 2009 ; Last revised: December 24, 2009