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A Trendy Approach to UK Inflation Dynamics 1
Author(s) -
Forbes Kristin,
Kirkham Lewis,
Theodoridis Konstantinos
Publication year - 2021
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/manc.12293
Subject(s) - economics , inflation (cosmology) , commodity , exchange rate , monetary policy , monetary economics , econometrics , inflation rate , macroeconomics , keynesian economics , finance , physics , theoretical physics
This paper focuses on the time series of UK inflation to isolate a low‐frequency and slow‐moving component (the trend) from deviations around this trend. This slow‐moving trend explains a substantial share of UK inflation dynamics. International prices are significantly correlated with the cyclical movements, and the exchange rate is significantly correlated with movements in the persistent trend. The significance of variables emphasized in standard models (i.e. slack and inflation expectations) varies, and the magnitude of their effects is smaller than for commodity prices and exchange rates. These results highlight the sensitivity of UK inflation to external events and provide guidance on how monetary policy should respond.