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

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.