A Trendy Approach to UK Inflation Dynamics

47 Pages Posted: 21 Jun 2017

See all articles by Kristin J. Forbes

Kristin J. Forbes

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Lewis Kirkham

Bank of England

Konstantinos Theodoridis

Cardiff University

Multiple version iconThere are 3 versions of this paper

Date Written: June 16, 2017

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

JEL Classification: E31, E5

Suggested Citation

Forbes, Kristin J. and Kirkham, Lewis and Theodoridis, Konstantinos, A Trendy Approach to UK Inflation Dynamics (June 16, 2017). Bank of England Working Paper No. 49. Available at SSRN: https://ssrn.com/abstract=2990338 or http://dx.doi.org/10.2139/ssrn.2990338

Kristin J. Forbes (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

Room E62-416
Cambridge, MA 02142
United States
617-253-8996 (Phone)

HOME PAGE: http://web.mit.edu/kjforbes/www

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Lewis Kirkham

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Konstantinos Theodoridis

Cardiff University ( email )

Aberconway Building
Colum Drive
Cardiff, Wales CF10 3EU
United Kingdom

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