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The role of energy in UK inflation and productivity
The recent rise in UK price inflation was unanticipated, leading to a flurry of activity rethinking inflation models. This column models UK price and wage inflation, productivity, and unemployment over a century and a half. The authors find that a reduction in energy availability simultaneously reduces output and exacerbates inflation, and also find empirical evidence for a wage–price spiral once inflation exceeds about 6–8%. Given that inflation in the UK was 8.8% in July 2022, this non-linearity warns how inflation could potentially take off. The recent relatively sudden increases in inflation rates in many ... (full story)