UK economy
Inflation and the output gap in the UK
25 March 2010
The analysis in this paper demonstrates that the level of the output gap has an important role in explaining inflation and suggests that the lagged effect of the large negative output gap will generate significant downward pressure on inflation over the next few years. The analysis also finds strong empirical evidence of the influence of import prices on inflation, with a one-off shock to import prices taking around 1 year to fully feed through to inflation. The paper also investigates the impact of the change in the output gap on inflation, known as ‘speed limit’ effects, and finds very limited evidence for this effect when output is below trend.
The analysis has informed the Treasury’s view on recent inflation developments and underpins judgements on the prospects for inflation.
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- Budget 2010
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