Tag: comovement

How broad-based is the increase in UK inflation?

Galina Potjagailo, Boromeus Wanengkirtyo and Jenny Lam

CPI inflation in the UK has markedly increased over the last year, reaching 10.1% in September. The aggregate increase reflects potentially different dynamics across disaggregated prices, from which CPI inflation is constructed. How much of the increase has been broad-based across a wide range of prices? We assess this through a measure of ‘underlying inflation’ that captures comovement across many disaggregated prices – energy, food and other (‘core’) price items. We observe a substantial rise in underlying inflation, hence many prices have increased jointly. Broad-based energy price increases have been the main driver of underlying inflation. Furthermore, about a quarter is due to core price items which reflect more persistent inflation.

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Monetary policy, sectoral comovement and the credit channel

Federico Di Pace and Christoph Görtz

There is ample evidence that a monetary policy tightening triggers a decline in consumer price inflation and a simultaneous contraction in investment and consumption (eg Erceg and Levin (2006) and Monacelli (2009)). However, in a standard two-sector New Keynesian model, consumption falls while investment increases in response to a monetary policy tightening. In a new paper, we propose a solution to this problem, known as the ‘comovement puzzle’. Guided by new empirical evidence on the relevance of frictions in credit provision, we show that adding these frictions to the standard model resolves the comovement puzzle. This has important policy implications because the degree of comovement between consumption and investment matters for the effectiveness of monetary policy.

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