Monetary policy and heterogeneous price effects in the United Kingdom

This paper examines the heterogeneous effects of monetary policy on consumer prices in the United Kingdom. We estimate a proxy Structural Vector Autoregressive (SVAR) model, using extended high-frequency monetary surprises from Cesa-Bianchi et al. (European Economic Review, 123, 2020, 103375) to instrument shifts in UK monetary policy. We then analyze the impulse responses for various components of the UK Consumer Price Index. Our findings reveal that while monetary policy tightening leads to a persistent decline in aggregate consumer prices, the impact on disaggregated components is highly heterogeneous. Notably, we observe that energy price changes offset movements in food, beverage, and tobacco prices, resulting in identical responses of core and headline consumer CPIH inflation measures. The contrasting effects across different CPI components highlight the importance of examining disaggregated data when assessing the transmission of monetary policy to consumer prices.