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A Network Analysis of the United Kingdom’s Consumer Price Index

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Abstract

In this paper we model the United Kingdom’s Consumer Price Index as a complex network and we apply clustering and optimization techniques to study the network evolution through time. By doing this, we provide a dynamic, multi-level analysis of the mechanism that drives inflation in the U.K. We find that the CPI classes’ network exhibits an evolving topology through time which depends substantially on the prevailing economic conditions in the U.K. We identify non-overlapping communities of these CPI classes and we observe that they do not correspond to the actual categories they belong to; a finding that suggests that diverse forces are driving the inter-relations of the CPI classes which are stronger between categories rather than within them. Finally, we construct a reduced version of the U.K. CPI that fulfills the core inflation measure criteria and can possibly be used as an appropriate measure of the underlying inflation in the U.K. Since this new measure makes use of only 14 out of the 85 U.K. CPI classes, it can be used to complement the Bank of England’s arsenal of core inflation measures without the need for further resource allocation.

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Notes

  1. The data was acquired from OECD’s database.

  2. We construct the U.K. CPI network for every year between 2002 and 2014 but only include the figures of the years 2003, 2008, 2009 and 2013 for illustration purposes and for the sake of brevity. The rest of the network formulations are available upon request.

  3. In the construction of the official Consumer Price Index each class of goods and services is weighted according to its expenditure share for each given period. However, since the newly created measures comprises only a subset of the 85 initial classes, the respective weights are recalculated to construct the new aggregate.

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Acknowledgments

This research has been co-financed by the European Union (European Social Fund (ESF)) and Greek national funds through the Operational Program ‘Education and Lifelong Learning’ of the National Strategic Reference Framework (NSRF)—Research Funding Program: THALES (MIS 380292). Investing in knowledge society through the European Social Fund.

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Authors and Affiliations

  1. Department of Economics, Democritus University of Thrace, University Campus, 69100, Komotini, Greece

    Georgios Antonios Sarantitis, Theophilos Papadimitriou & Periklis Gogas

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  1. Georgios Antonios Sarantitis
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  2. Theophilos Papadimitriou
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  3. Periklis Gogas
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Correspondence to Georgios Antonios Sarantitis.

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Sarantitis, G.A., Papadimitriou, T. & Gogas, P. A Network Analysis of the United Kingdom’s Consumer Price Index. Comput Econ 51, 173–193 (2018). https://doi.org/10.1007/s10614-016-9625-9

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