Measuring core inflation in the UK

Li, Yiyi 2023. Measuring core inflation in the UK. PhD Thesis, Cardiff University. Item availability restricted.

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Abstract

This PhD thesis provides a comprehensive analysis of inflation in the UK, adopting a data-driven approach to model inflation, evaluate different measures of core inflation, and investigate the impact of monetary shocks on output. The study begins by modelling month-on-month (mom) inflation as an autoregressive process, taking into account factors such as seasonality and VAT changes. A significant 12-month lag effect on inflation was identified, leading to a degree of persistence in annual inflation. This effect was found to exist at the aggregate level and within the majority of consumer expenditure categories. The research also explored the individual components of the Consumer Price Index (CPI) basket using the System of National Accounts (SNA) COICOP expenditure divisions up to 4 digits. The study found that inflation is best explained by itself, indicating a focus on core measures of inflation without reference to other variables. In addition to analysing mom inflation, the thesis investigated different methods for measuring core inflation and their effectiveness in predicting future inflation at the 12- month horizon. The exclusion of food and energy prices, the use of trimmed means, and the inclusion of sticky prices were evaluated. The results showed that the exclusion of food and energy measure and the sticky price index have the best forecasting performance at the 12-month horizon, while the autoregressive and seasonal autoregressive integrated moving average models have the worst performance. In the third chapter, the thesis delves deeper into the intricacies of inflation persistence and the impact of monetary shocks on output. The Generalized Taylor Economy (GTE) model proposed by Dixon and Kara (2005b) was introduced, providing a flexible framework for capturing the heterogeneity of wage-setting processes across sectors. The research underscores the significant influence of long-term contracts on economic output and its persistence. Furthermore, the diverse range of contract lengths present in the economy and their potential influence on economic dynamics is significant. Measuring Core Inflation in the UK Abstract Page III Overall, this thesis has made a valuable contribution to the literature on macroeconomic modeling by providing a more comprehensive understanding of inflation persistence, the impact of monetary shocks on output, and the effectiveness of different measures of core inflation in forecasting future inflation. The findings of the study have important implications for policymakers and practitioners who rely on accurate inflation forecasts to make informed decisions.

Item Type:	Thesis (PhD)
Date Type:	Completion
Status:	Unpublished
Schools:	Business (Including Economics)
Subjects:	H Social Sciences > H Social Sciences (General)
Uncontrolled Keywords:	“core inflation”, “UK inflation”, “data-driven approach”, “monetary shocks”, “output”, “Consumer Price Index”, “COICOP expenditure divisions”, “inflation persistence”, “forecasting performance” and “sticky prices”
Date of First Compliant Deposit:	28 June 2023
Last Modified:	28 Jun 2023 09:38
URI:	https://orca.cardiff.ac.uk/id/eprint/160638

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