Global value chains and inflation: how imported inputs shape UK prices

Aydan Dogan, Melih Firat and Aditya Soenarjo

How does the use of imported inputs in production affect inflation dynamics in the UK? Over the past few decades, with the rise of global value chains (GVCs), production processes have become increasingly interlinked across countries and sectors. This interconnection means that firms’ pricing decisions are now more influenced by foreign factors. The importance of globalisation in shaping inflation dynamics was highlighted during the supply-chain disruptions caused by the Covid-19 crisis. In a recent paper, we explore the impact of the rising share of imported intermediate goods on the UK Phillips curve. We show that UK industries with higher shares of intermediate imports from emerging market economies (EMEs) have flatter Phillips curves.

Continue reading →

Dissecting UK service inflation via a neural network Phillips curve

Marcus Buckmann, Galina Potjagailo and Philip Schnattinger

Understanding the origins of currently high inflation is a challenge, since the effects from a range of large shocks are layered on top of each other. The rise of UK service price inflation to up to 6.9% in April might potentially reflect external shocks propagating to a wider range of prices and into domestic price pressures. In this blog post we disentangle what might have contributed to the rise in service inflation in the UK using a neural network enhanced with some economic intuition. Our analysis suggests that much of the increase stems from spillovers from goods prices and input costs, a build-up of service inflation inertia and wage effects, and a pick-up in inflation expectations.

Continue reading →

Did supply constraints tilt the Phillips Curve?

Ambrogio Cesa-Bianchi, Edward Hall, Marco Pinchetti and Julian Reynolds

The remarkable stability of US inflation dynamics in the pre-Covid era had led many to think that the Phillips Curve had flattened. However, the sharp rise in inflation that followed the Covid-19 pandemic ignited a debate on whether the Phillips Curve had steepened and, in particular, whether its slope depends on some particular macroeconomic conditions. Which are these conditions, though? In this post, we argue that one important candidate that could explain this kind of state-dependency in the slope of the Phillips Curve is global supply chain constraints. We propose a simple framework to account for this state-dependency, and conduct econometric analysis on US data which supports its implications – showing that inflation in the US is more responsive to slack when supply constraints are tighter.

Continue reading →

Does long-term unemployment affect inflation dynamics?

Vania Esady, Bradley Speigner and Boromeus Wanengkirtyo

The headline unemployment rate is one of the most widely used indicators of economic slack to measure the state of the business cycle. A large empirical literature on Phillips curve estimation has explored whether more general definitions of labour utilisation are more informative than this simple measure. In a new paper, we investigate whether the duration distribution of unemployment contains useful information for modelling inflation dynamics. More specifically, do short and long-term unemployment (by long-term unemployment we mean individuals who are unemployed for 27 weeks or longer) play separate roles in the Phillips curve?

Continue reading →

What can regional data tell us about the UK Phillips Curve?

Alex Tuckett

The Phillips Curve (PC) is an old concept in economics, but it is a durable one. The simple idea behind the PC is that the lower the rate of unemployment, the faster wages will grow. If the PC has changed over time, that can have important implications for monetary policymakers. Analysis of regional UK data suggests that the PC has shifted down over time, but has not necessarily become flatter. Higher levels of educational attainment are likely to have contributed to this shift.

Continue reading “What can regional data tell us about the UK Phillips Curve?” →