Investigating the behaviour of individual UK prices, and gauging the implications thereof for monetary policy

This context statement and the associated public works examine the behaviour of individual goods and services prices in the United Kingdom, and the implications thereof for monetary policy and monetary policy makers. Until recently, many macroeconomic and monetary policy models have made relatively simplistic assumptions about the microeconomic behaviour of prices. Research has uncovered that, in many countries, these assumptions may not hold. However, there has been almost no prior empirical work that has examined how individual prices actually behave in the United Kingdom. The research embodied in this context statement and public works represents original work that explores how individual UK prices of goods and services are measured and actually behave at the microeconomic level, using both official and private sector data sources that have not previously been employed in academic research. This analysis uncovers the rich heterogeneity in pricing behaviour that actually exists at the microeconomic level. By examining the varied datasets, it is apparent that the standard assumptions in typical macroeconomic and monetary policy models are frequently violated. The empirical behaviour of individual prices also has important implications for monetary policy and monetary policy makers. These include the optimal design of monetary policy, in terms of the role of inflation targeting, the correct monetary policy response to the different shocks that hit the economy, and the challenge of capturing the rich heterogeneity that is present in the UK economy within a parsimonious model.