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

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 U.K. CPI classes and we observe that they do not correspond to the actual categories they belong into; 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 present 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.

Keywords: Network Analysis, Threshold-Minimum Dominating Set, community detection, core inflation, consumer price index

JEL Classification: E31, E52, C61