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The Common Component of CPI: An Alternative Measure of Underlying Inflation for Canada

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  • Mikael Khan
  • Louis Morel
  • Patrick Sabourin
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    Abstract

    In this paper, the authors propose a measure of underlying inflation for Canada obtained from estimating a monthly factor model on individual components of the CPI. This measure, labelled the common component of CPI, has intuitive appeal and a number of interesting features. In particular, it is not affected by sector-specific price movements that can distort the signal in many other measures of underlying inflation, and appears to capture price movements that are indicative of aggregate demand fluctuations in the Canadian economy. This indicator may serve as a useful complement to existing measures of underlying inflation monitored by the Bank of Canada.

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    Bibliographic Info

    Paper provided by Bank of Canada in its series Working Papers with number 13-35.

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    Length: 20 pages
    Date of creation: 2013
    Date of revision:
    Handle: RePEc:bca:bocawp:13-35

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    Phone: 613 782-8845
    Fax: 613 782-8874
    Web page: http://www.bank-banque-canada.ca/

    Related research

    Keywords: Business fluctuations and cycles; Econometric and statistical methods; Inflation and prices; Monetary policy framework;

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    1. Cristadoro, Riccardo & Forni, Mario & Reichlin, Lucrezia & Veronese, Giovanni, 2005. "A Core Inflation Indicator for the Euro Area," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(3), pages 539-60, June.
    2. Jean Boivin & Marc P. Giannoni & Ilian Mihov, 2009. "Sticky Prices and Monetary Policy: Evidence from Disaggregated US Data," American Economic Review, American Economic Association, vol. 99(1), pages 350-84, March.
    3. George Kapetanios, 2002. "Modelling Core Inflation for the UK Using a New Dynamic Factor Estimation Method and a Large Disaggregated Price Index Dataset," Working Papers 471, Queen Mary, University of London, School of Economics and Finance.
    4. Necati Tekatli, 2010. "A New Core Inflation Indicator for Turkey," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 10(2), pages 9-21.
    5. Domenico Giannone & Troy Matheson, 2007. "A new core inflation indicator for New Zealand," ULB Institutional Repository 2013/6407, ULB -- Universite Libre de Bruxelles.
    6. Jean Boivin & Serena Ng, 2005. "Understanding and Comparing Factor-Based Forecasts," NBER Working Papers 11285, National Bureau of Economic Research, Inc.
    7. Marlene Amstad & Simon Potter, 2009. "Real time underlying inflation gauges for monetary policymakers," Staff Reports 420, Federal Reserve Bank of New York.
    8. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 2002. "The Generalized Dynamic Factor Model: One-Sided Estimation and Forecasting," CEPR Discussion Papers 3432, C.E.P.R. Discussion Papers.
    9. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 1999. "The Generalized Dynamic Factor Model: Identification and Estimation," CEPR Discussion Papers 2338, C.E.P.R. Discussion Papers.
    10. Stephen Murchison, 2009. "Exchange Rate Pass-through and Monetary Policy: How Strong is the Link?," Working Papers 09-29, Bank of Canada.
    11. Ricardo Reis & Mark W. Watson, 2007. "Relative Goods' Prices, Pure Inflation, and the Phillips Correlation," NBER Working Papers 13615, National Bureau of Economic Research, Inc.
    12. Stock J.H. & Watson M.W., 2002. "Forecasting Using Principal Components From a Large Number of Predictors," Journal of the American Statistical Association, American Statistical Association, vol. 97, pages 1167-1179, December.
    13. Bai, Jushan & Ng, Serena, 2007. "Determining the Number of Primitive Shocks in Factor Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 52-60, January.
    14. Frédérick Demers, 2003. "The Canadian Phillips Curve and Regime Shifting," Working Papers 03-32, Bank of Canada.
    15. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 147-62, April.
    16. James H. Stock & Mark W. Watson, 2005. "Implications of Dynamic Factor Models for VAR Analysis," NBER Working Papers 11467, National Bureau of Economic Research, Inc.
    17. Hogan, Seamus & Marianne Johnson & Thérèse Laflèche, 2001. "Core Inflation," Technical Reports 89, Bank of Canada.
    18. Michael Kirker, 2010. "What drives core inflation? A dynamic factor model analysis of tradable and nontradable prices," Reserve Bank of New Zealand Discussion Paper Series DP2010/13, Reserve Bank of New Zealand.
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