Exchange rate and foreign price effects on UK inflation

The issue of incomplete pass-through from exchange rate changes to domestic inflation has received considerable attention. Most models try to account for this by using a variety of assumptions about the costs of changing prices. These suggest complete pass-through, but only after the possible elapse of a considerable delay. In contrast, in this article Graeme Chamberlin and Brian Henry provide evidence that exchange rate effects on inflation may be non-linear and, more specifically, subject to thresholds. Their tentative results suggest this may be important in describing price-setting behaviour in the UK.