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Global value chains and the dynamics of UK inflation

Author

Listed:
  • Aquilante, Tommaso

    (Bank of England)

  • Dogan, Aydan

    (Bank of England)

  • Firat, Melih

    (International Monetary Fund)

  • Soenarjo, Aditya

    (London School of Economics)

Abstract

This paper explores the link between the UK’s participation in global value chains (GVCs) and inflation dynamics. Using sectoral data, we find evidence indicating that UK industries with higher proportions of imported inputs from emerging market economies (EMEs) exhibit a flatter Phillips curve. We then build a two-country model with input-output linkages and demonstrate analytically that an increased reliance on imported intermediate goods, serving as a proxy for GVCs, results in a flatter Phillips curve. Additionally, GVC integration affects inflation dynamics through the influence of cyclical forces that shape firms’ marginal costs via terms of trade fluctuations. Specifically, we highlight how the limited business cycle correlation between the UK economy and EMEs reduces the pass-through of domestic shocks to prices.

Suggested Citation

  • Aquilante, Tommaso & Dogan, Aydan & Firat, Melih & Soenarjo, Aditya, 2024. "Global value chains and the dynamics of UK inflation," Bank of England working papers 1060, Bank of England.
    • Handle: RePEc:boe:boeewp:1060
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Global value chains; inflation dynamics; Phillips curve;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F10 - International Economics - - Trade - - - General
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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