Working Paper No. 21
By C L Melliss
A marked divergence in inflation rates between the tradables and non-tradables sectors has been a feature of some EC economies, especially those of Italy, Spain and the UK, since the early 1980s. Sectoral productivity differences, international competitive pressures - perhaps linked to ERM membership, and government demand for non-tradables are possible reasons. Empirical estimates of sectoral price equations are presented for the UK, using especially constructed RPI-based series. Competing import prices, unit labour costs, and input prices are found to be the main determinants of tradable prices. For non-tradables government demand is important. Tests show that tradable prices Granger-cause non-tradable prices in France, Germany and Italy as well as the UK.