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Core Inflation

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Author Info
Hogan, Seamus
Marianne Johnson
Thérèse Laflèche

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Abstract

The Bank of Canada uses core CPI inflation, the year-over-year rate of change of the consumer price index excluding food, energy, and the effects of changes in indirect taxes, as the operational guide for monetary policy. In this report we study the concept and measurement of core or underlying inflation more generally by examining several alternative measures of core inflation, from the viewpoint that core inflation is a tool for policy purposes, either as an indicator of current and future trends in inflation, or as a viable target for monetary policy. A simple model of price determination is proposed that defines the core conceptually, and illustrates the process by which aggregate inflation rates may differ from the core. As a measure of inflation for policy purposes, core inflation is useful to the extent that it can be measured accurately. Therefore, following a discussion of conceptual issues, the report's focus narrows and we introduce the various measures of core inflation, concluding with a comparative evaluation of those measures. We find the alternatives quite similar in many respects. However, a closer assessment based on their suitability to various policy purposes suggests that different measures do well along different dimensions.

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File URL: http://www.bankofcanada.ca/en/res/tr/2001/tr89.pdf
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Publisher Info
Paper provided by Bank of Canada in its series Technical Reports with number 89.

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Length: 69 pages
Date of creation: 2001
Date of revision:
Handle: RePEc:bca:bocatr:89

Contact details of provider:
Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada
Phone: 613 782-8899
Fax: 613 782-8874
Web page: http://www.bank-banque-canada.ca/

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Postal: Publications Distribution, Bank of Canada, 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada
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Web: http://www.bank-banque-canada.ca/en/publication/pub_res.html

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Related research
Keywords: Inflation and prices;

Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Shiratsuka, Shigenori, 1997. "Inflation Measures for Monetary Policy: Measuring the Underlying Inflation Trend and Its Implication for Monetary Policy Implementation," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 15(2), pages 1-26, December. [Downloadable!]
  2. Michael F. Bryan & Stephen G. Cecchetti, 1993. "The consumer price index as a measure of inflation," Economic Review, Federal Reserve Bank of Cleveland, issue Q IV, pages 15-24. [Downloadable!]
    Other versions:
  3. Armour, J. & Atta-Mensah, J. & Engert, W. & Hendry, S., 1996. "A Distant-Early-Warning Model of Inflation Based on M1 Disequilibria," Working Papers 96-5, Bank of Canada. [Downloadable!]
  4. Michael F. Bryan & Stephen G. Cecchetti & Rodney L. Wiggins II, 1997. "Efficient Inflation Estimation," NBER Working Papers 6183, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Rowe, Nicholas & Yetman, James, 2000. "Identifying Policy-makers' Objectives: An Application to the Bank of Canada," Working Papers 00-11, Bank of Canada. [Downloadable!]
  6. Laurence Ball, 1997. "Efficient Rules for Monetary Policy," NBER Working Papers 5952, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Danny Quah & Shaun Vahey, . "Measuring Core Inflation," Bank of England working papers 31, Bank of England.
    Other versions:
  8. Hilde Christiane Bjørnland, 1997. "Estimating Core Inflation - The Role of Oil Price Shocks and Imported Inflation," Discussion Papers 200, Research Department of Statistics Norway. [Downloadable!]
  9. Atta-Mensah, J, 1996. "A Modified P*-Model of Inflation Based on M1," Working Papers 96-15, Bank of Canada. [Downloadable!]
  10. Stephen G. Cecchetti, 1996. "Measuring Short-Run Inflation for Central Bankers," NBER Working Papers 5786, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  11. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-53, October. [Downloadable!] (restricted)
  12. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June. [Downloadable!] (restricted)
    Other versions:
  13. Ball, Laurence & Mankiw, N Gregory, 1995. "Relative-Price Changes as Aggregate Supply Shocks," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 161-93, February. [Downloadable!] (restricted)
    Other versions:
  14. Nicholas Ricketts & David Rose, . "Inflation, Learning And Monetary Policy Regimes In The G-7 Economies," Working Papers 95-6, Bank of Canada. [Downloadable!]
  15. Michael F. Bryan & Christopher J. Pike, 1991. "Median price changes: an alternative approach to measuring current monetary inflation," Economic Commentary, Federal Reserve Bank of Cleveland, issue Dec 1. [Downloadable!]
  16. Jeffrey J. Hallman & Richard D. Porter & David H. Small, 1989. "M2 per unit of potential GNP as an anchor for the price level," Staff Studies 157, Board of Governors of the Federal Reserve System (U.S.).
  17. Thérèse Laflèche, 1997. "Mesures du taux d'inflation tendanciel," Working Papers 97-9, Bank of Canada. [Downloadable!]
  18. Scott Roger, 1998. "Core inflation: concepts, uses and measurement," Reserve Bank of New Zealand Discussion Paper Series G98/9, Reserve Bank of New Zealand. [Downloadable!]
  19. Michael F. Bryan & Stephen G. Cecchetti, 1996. "Inflation and the Distribution of Price Changes," NBER Working Papers 5793, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  20. St-Amant, Pierre & Tessier, David, 1998. "Résultats empiriques multi-pays relatifs à l'impact des cibles d'inflation sur la crédibilité de la politique monétaire," Working Papers 98-23, Bank of Canada. [Downloadable!]
    Other versions:
  21. repec:wop:imespe:9707 is not listed on IDEAS
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Mick Silver, 2006. "Core Inflation Measures and Statistical Issues in Choosing Among Them," IMF Working Papers 06/97, International Monetary Fund. [Downloadable!]
  2. Jamie Armour, 2006. "An Evaluation of Core Inflation Measures," Working Papers 06-10, Bank of Canada. [Downloadable!]
  3. Michael Pedersen, 2006. "An Alternative Measure of Core Inflation," Working Papers Central Bank of Chile 366, Central Bank of Chile. [Downloadable!]
  4. Ivan Roberts, 2005. "Underlying Inflation: Concepts, Measurement and Performance," RBA Research Discussion Papers rdp2005-05, Reserve Bank of Australia. [Downloadable!]
  5. Tsyplakov Alexander, 2004. "Constructing Core Inflation Index for Russia," EERC Working Paper Series 04-04e, EERC Research Network, Russia and CIS. [Downloadable!]
  6. Martha Misas Arango & Enrique López Enciso & Juana Téllez Corredor & José Fernando Escobar, . "La Inflación Subyacente en Colombia: Un Enfoque de Tendencias Estocásticas Comunes Asociadas a un VEC Estructural," Borradores de Economia 324, Banco de la Republica de Colombia. [Downloadable!]
    Other versions:
  7. Robert Rich & Charles Steindel, 2007. "A comparison of measures of core inflation," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 19-38. [Downloadable!]
  8. Cotter, John & Dowd, Kevin, 2006. "U.S. Core Inflation: A Wavelet Analysis," MPRA Paper 3520, University Library of Munich, Germany. [Downloadable!]
  9. Colin Bermingham, 2007. "How Useful is Core Inflation for Forecasting Headline Inflation?," The Economic and Social Review, Economic and Social Studies, vol. 38(3), pages 355–377. [Downloadable!]
  10. Robert Rich & Charles Steindel, 2005. "A review of core inflation and an evaluation of its measures," Staff Reports 236, Federal Reserve Bank of New York. [Downloadable!]
  11. Kevin Clinton, 2006. "Core inflation at the Bank of Canada: A critique," Working Papers 1077, Queen's University, Department of Economics. [Downloadable!]
  12. Bermingham, Colin, 2006. "How Useful is Core Inflation for Forecasting Headline Inflation?," Research Technical Papers 11/RT/06, Central Bank & Financial Services Authority of Ireland (CBFSAI). [Downloadable!]
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