Blockwise Boosted Inflation: non-linear determinants of inflation using machine learning (with Marcus Buckmann and Philip Schnattinger), BoE Staff Working Paper, 2025.
Abstract: We propose the Blockwise Boosted Inflation Model (BBIM), a boosted tree framework that decomposes inflation dynamics into predictive components aligned with an open-economy hybrid Phillips curve. Demand and supply contributions are identified by imposing monotonicity constraints, ensuring theory-consistent links between inflation and key indicators. Applied to monthly UK CPI inflation, the model shows that the recent surge has been driven mainly by global supply shocks transmitted through supply chains. We also uncover an L-shaped Phillips curve relationship between inflation and labour market tightness, with tight labour markets amplifying recent inflationary pressures. By contrast, earlier episodes saw non-linearities more strongly tied to broader slack, particularly during recessions. The model further accounts for trend shifts informed by inflation expectations. Short-term household expectations have recently displayed persistent non-linear effects, temporarily raising trend inflation and prolonging inflationary pressures, while longer-term expectations remain anchored. Out-of-sample, the BBIM delivers competitive forecasting performance relative to linear benchmarks and unstructured machine learning methods. Our approach provides a flexible yet interpretable framework that combines economic structure with machine learning for policy-relevant analysis of inflation dynamics.
Blog post: "Boosted inflation - using machine learning to make sense of non-linear determinants of inflation", Bank Underground, May 2025
Coverage: Catherine L. Mann: "Five 'C's for Central Bank Research", speech given at The Future of Central Banking conference, Banco de México, August 2025; Megan Greene: "The Supply Side Demands More Attention", speech given at Adam Smith Business School, University of Glasgow, September 2025.
Infusing economically motivated structure into machine learning methods (with Marcus Buckmann), BoE Staff Working Paper, 2025.
Will appear as chapter in the forthcoming book Central Banking, Monetary Policy, and Artificial Intelligence, edited by Marcos Centurion-Vicencio, Louis‑Philippe Rochon and Guillaume Vallet.
Firms pricing in the UK: survey expectations and industry-level determinants (with Cristina Griffa, University of Chile)
Abstract: We exploit the CBI survey that collects UK firms’ quarterly expectations and perceptions about their own-price inflation and about inflation in markets the firms compete in (own-industry) since 2009. Own-price inflation expectations are found to be robustly positively associated with firms’ price changes. There is evidence for inattention to industry-wide inflation, since own-price and own-industry expected inflation is often reported to be identical. However, when firms expect higher inflation in their industry compared to their own-price expectations, this is associated with additional price increases. The effects are asymmetric, i.e., non-existent when own-industry inflation is expected to be lower. This can have aggregate implications since the effects of inflationary shocks could be amplified when they affect entire industries and firms are catching up to each other in their price setting.
Coverage: Catherine L. Mann: "Mind the gap(s): Inflation data and prospects", speech given at the Official Monetary and Financial Institutions Forum.
Lloyd, S., H. Pill, and G. Potjagailo (2025). Inflation Targeting and monetary policy in practice: the experience of the Bank of England. Chapter 26 in: Research Handbook on Inflation. Edited by G. Ascari and R. Trezzi. May 2025.
Kohns, D. and G. Potjagailo (2025). Flexible Bayesian MIDAS: time-variation, group-shrinkage, and sparsity Journal of Business and Economic Statistics, April 2025. Replication codes coming soon.
Joseph, A., G. Potjagailo, C. Chakraborty, and G. Kapetanios (2024). Forecasting UK inflation bottom up. International Journal of Forecasting, Volume 40, Issue 4, October–December 2024, Pages 1521-1538
Potjagailo, G. and M.H Wolters (2023). Global financial cycles since 1880. Journal of International Money and Finance, Vol. 131, March 2023.
Blog post: "Global Financial Cycles since 1880" (with Maik Wolters), Bank Underground, August 2020
Jannsen, N., Potjagailo, G. and M.H. Wolters (2019). Monetary policy during financial crises: Is the transmission mechanism impaired? International Journal of Central Banking, Vol. 15, No. 4, October 2019.
Potjagailo, G. (2017). Spillover effects from Euro Area Monetary Policy across Europe: A Factor-Augmented VAR approach. Journal of International Money and Finance (72), 127-147.
"Dissecting UK service inflation with a neural network Phillips curve" (with Marcus Buckmann and Philip Schnattinger), Bank Underground blog post, July 2023
"How broad-based is UK inflation?" (with Boromeus Wanengkyrtio and Jenny Lam), Bank Underground blog post, October 2022