Inflation thresholds and oil shock transmission in the UK: a self-exciting threshold VAR approach (with Andrew Gaffney, Katerina Petrova, Andrea Sisko). Bank of England Macro Technical Paper No. 8, July 2026.
Abstract: This paper identifies inflation thresholds and analyses state-dependent inflation dynamics in the UK using a Self-Exciting Threshold Vector Autoregression (SET-VAR). The model combines endogenous threshold estimation with regime-dependent shock transmission, providing a tractable tool for analysing non-linear inflation dynamics. We illustrate how the approach can be used to analyse the transmission of global oil supply shocks and conduct counterfactual simulations to quantify the role of expectations in amplifying inflationary effects. Further, within each identified inflation regime, we examine how shock transmission differs between periods of tight and slack labour markets. Using monthly UK data, we find that inflation dynamics change once year-on-year CPI inflation rises above thresholds of around 3.1% and 3.5% in samples beginning in 1989 and 1976, respectively. Oil price increases generated by adverse global oil supply news shocks have substantially larger and more persistent effects on UK CPI inflation in high-inflation regimes. Counterfactual analysis indicates that much of this amplification reflects second-round effects operating through household inflation expectations, with amplification strongest when elevated inflation coincides with tight labour markets.
Coverage: Bank of England Monetary Policy Reports (November 2025, Box C; April 2026, Box C); Megan Greene: "Here we go again? Assessing the inflation risks of the recent energy shock". Speech, June 2026; Catherine L. Mann: "Five 'C's for Central Bank Research", speech, August 2025; Huw Pill: "The courage not to act", speech, May 2025.
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 is a flexible, interpretable framework combining 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, August 2025; Megan Greene: "The Supply Side Demands More Attention", speech, 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: Do firms factor in expectations about prices of their competitors when setting their prices? We exploit unique survey data that asks firms in the United Kingdom on a quarterly basis about the realised and expected price changes for their own prices and the prices of their domestic competitors. We find that, over the period 2009 to 2023, own-price inflation expectations are robustly positively associated with the firm’s price changes. Own-price and own-industry expected price changes are often reported to be identical, pointing to inattention to industry-wide inflation. However, when firms expected their competitors' price changes to lie above what they expect for their own price changes, they end up increasing their prices by more. This effect is asymmetric: there is no similar downward price adjustment when the firm expects its competitors’ price changes to be lower than their own. Hence, firms have more scope to adjust their prices upward without losing market share if they expect their competitors to do so too.
Coverage: Catherine L. Mann: "Mind the gap(s): Inflation data and prospects", speech, February 2024.
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