Inflation dynamics in a New Keynesian model

A New Keynesian model is used to derive a relationship between current and expected future inflation taking into account future inflationary pressure. This relationship is employed to examine inflationary dynamics resulting from real disturbances to the economy. Positive current inflationary pressure can be associated with either rising or falling inflation-a phenomenon which has received little attention to date. A data-based model of the UK is used to provide further evidence on the nature of the response of inflation to real disturbances and to quantify the importance of inertia in goods and labour markets.