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What explains recent UK inflation? An application of the Bernanke-Blanchard model

Author

Listed:
  • Haskel, Jonathan
  • Martin, Josh
  • Brandt, Lennart

Abstract

In recent years UK inflation has risen to levels not seen for decades and then fallen back. What caused this? We estimate a version of the Bernanke and Blanchard (2023) inflation model for the UK using quarterly data from 1990 to 2024. It is a semi-structural model that explains wage growth, price inflation, and short- and long-run inflation expectations, as functions of labour market tightness, shocks to energy and food prices, supply chain disruptions, and labour productivity. The estimated parameters are similar to those for the US, although the UK appears to have stickier wage and price inflation and more persistent effects of food price shocks. UK inflation in 2021 is explained by supply chain disruptions and energy price shocks, and in 2022 and 2023 also by food price shocks and labour market tightness. Inflation expectations have been more well-anchored than predicted by the model. Illustrative projections suggest inflation is ‘sticky’ and so may take time to return sustainably to target.

Suggested Citation

  • Haskel, Jonathan & Martin, Josh & Brandt, Lennart, 2025. "What explains recent UK inflation? An application of the Bernanke-Blanchard model," Discussion Papers escoe-dp-2025-12, Economic Statistics Centre of Excellence.
    • Handle: RePEc:eoe:escoed:escoe-dp-2025-12
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    References listed on IDEAS

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    1. Laidler, David E W, 1976. "Inflation in Britain: A Monetarist Perspective," American Economic Review, American Economic Association, vol. 66(4), pages 485-500, September.
    2. Jordà, Òscar & Nechio, Fernanda, 2023. "Inflation and wage growth since the pandemic," European Economic Review, Elsevier, vol. 156(C).
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    4. Michael Bruno & Jeffrey D. Sachs, 1985. "Economics of Worldwide Stagflation," NBER Books, National Bureau of Economic Research, Inc, number brun85-1.
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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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