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The historical role of energy in UK inflation and productivity and implications for price inflation in 2022

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  • Jennifer L. Castle
  • David F. Hendry
  • Andrew B. Martinez

Abstract

We model UK price and wage inflation, productivity and unemployment over a century and a half of data, selecting dynamics, relevant variables, non-linearities and location and trend shifts us¬ing indicator saturation estimation. The four congruent econometric equations highlight complex interacting empirical relations. The production function reveals a major role for energy inputs ad-ditional to capital and labour, and although the price inflation equation shows a small direct impact of energy prices, the substantial rise in oil and gas prices seen by mid-2022 contribute half of the increase in price inflation. We find empirical evidence for non-linear adjustments of real wages to inflation: a wage-price spiral kicks in when inflation exceeds about 6–8% p.a. We also find an addi-tional non-linear reaction to unemployment, consistent with involuntary unemployment. A reduction in energy availability simultaneously reduces output and exacerbates inflation.

Suggested Citation

  • Jennifer L. Castle & David F. Hendry & Andrew B. Martinez, 2022. "The historical role of energy in UK inflation and productivity and implications for price inflation in 2022," Economics Series Working Papers 983, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:983
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    References listed on IDEAS

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    Cited by:

    1. Castle, Jennifer L. & Doornik, Jurgen A. & Hendry, David F., 2024. "Improving models and forecasts after equilibrium-mean shifts," International Journal of Forecasting, Elsevier, vol. 40(3), pages 1085-1100.

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    More about this item

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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