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A Comprehensive Evaluation of Measures of Core Inflation for Canada

Author

Listed:
  • Mikael Khan
  • Louis Morel
  • Patrick Sabourin

Abstract

This paper evaluates the usefulness of various measures of core inflation for the conduct of monetary policy. Traditional exclusion-based measures of core inflation are found to perform relatively poorly across a range of evaluation criteria, in part due to their inability to filter unanticipated transitory shocks. In contrast, measures such as the trimmed mean and the common component of CPI perform favorably, since they better capture persistent price movements and tend to move with macroeconomic drivers. All measures of core inflation, however, have limitations – consequently, there is merit in monitoring a set of measures. Moreover, core inflation measures are best viewed as complements to, rather than substitutes for, the thorough analysis of inflation and capacity pressures that informs the monetary policy process.

Suggested Citation

  • Mikael Khan & Louis Morel & Patrick Sabourin, 2015. "A Comprehensive Evaluation of Measures of Core Inflation for Canada," Discussion Papers 15-12, Bank of Canada.
    • Handle: RePEc:bca:bocadp:15-12
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    References listed on IDEAS

    as
    1. Mikael Khan & Louis Morel & Patrick Sabourin, 2013. "The Common Component of CPI: An Alternative Measure of Underlying Inflation for Canada," Staff Working Papers 13-35, Bank of Canada.
    2. Laurence Savoie-Chabot & Mikael Khan, 2015. "Exchange Rate Pass-Through to Consumer Prices: Theory and Recent Evidence," Discussion Papers 15-9, Bank of Canada.
    3. Frederic S. Mishkin, 2007. "Headline versus core inflation in the conduct of monetary policy : a speech at the Business Cycles, International Transmission and Macroeconomic Policies Conference, HEC Montreal, Montreal, Canada, Oc," Speech 332, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:

    1. Carlomagno, Guillermo & Fornero, Jorge & Sansone, Andrés, 2023. "A proposal for constructing and evaluating core inflation measures," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 4(3).
    2. Guillermo Carlomagno & Jorge Fornero & Andrés Sansone, 2021. "Toward a general framework for constructing and evaluating core inflation measures," Working Papers Central Bank of Chile 913, Central Bank of Chile.
    3. Iris Day, 2017. "Underlying Consumer Price Inflation in China," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 29-36, December.
    4. Aðalheiður Ó. Guðlaugsdóttir & Lilja S. Kro, 2018. "The common component of the CPI - A trendy measure of Icelandic underlying inflation," Economics wp78, Department of Economics, Central bank of Iceland.
    5. Eliana R. González-Molano & Ramón Hernández-Ortega & Edgar Caicedo-García & Nicolás Martínez-Cortés & Jose Vicente Romero & Anderson Grajales-Olarte, 2020. "Nueva Clasificación del BANREP de la Canasta del IPC y revisión de las medidas de Inflación Básica en Colombia," Borradores de Economia 1122, Banco de la Republica de Colombia.

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    More about this item

    Keywords

    Inflation and prices; Monetary policy framework;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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