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Core Inflation in the UK

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Author Info
Joanne Cutler
Abstract

This paper presents a new measure of core inflation for the UK based on the idea that it is the persistence of individual inflation rates which matters in measuring the level of underlying inflation. The measure is based on the same components as RPIX, but it weights individual price changes by their past persistence, instead of their importance in households’ budgets, to derive a persistence-weighted core inflation measure, or RPIXP for short. This operationalises Blinder’s concept of core inflation as the durable or persistence part of aggregate inflation. The paper evaluates this new measure against existing measures in terms of its ability to predict future RPIX inflation. It finds that the new RPIXP is a good predictor of RPIX 6 months and 12 months ahead, and outperforms most other core inflation measures, as well as current RPIX itself, in its predictive ability. Surprisingly, RPIX excluding food and energy - which is a popular way of measuring underlying inflation - is a poor predictor of RPIX. One reason is that this measure excludes non-seasonal food prices which are highly persistent in the UK.

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Paper provided by Monetary Policy Committee Unit, Bank of England in its series Discussion Papers with number 03.

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Date of creation: 2001
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Handle: RePEc:mpc:wpaper:03

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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. C.K. Folkertsma & K. Hubrich, 2000. "Performance of core inflation measures," WO Research Memoranda (discontinued) 639, Netherlands Central Bank, Research Department. [Downloadable!]
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  2. Quah, Danny & Vahey, Shaun P, 1995. "Measuring Core Inflation?," Economic Journal, Royal Economic Society, vol. 105(432), pages 1130-44, September. [Downloadable!] (restricted)
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  3. D. J. E. Baestaens, 1997. "Comment," European Journal of Finance, Taylor and Francis Journals, vol. 3(3), pages 203-224, September. [Downloadable!] (restricted)
  4. Michael F. Bryan & Stephen G. Cecchetti, 1993. "Measuring Core Inflation," NBER Working Papers 4303, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Stephen G. Cecchetti, 1997. "Measuring short-run inflation for central bankers," Review, Federal Reserve Bank of St. Louis, issue May, pages 143-155. [Downloadable!]
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(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. Ian Babetskii & Fabrizio Coricelli & Roman Horváth, 2007. "Measuring and Explaining Inflation Persistence: Disaggregate Evidence on the Czech Republic," Working Papers IES 2007/22, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Aug 2007. [Downloadable!]
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  2. Páez-Farrell, Juan, 2007. "Monetary Policy Rules in Theory and in Practice: Evidence from the UK and the US," Cardiff Economics Working Papers E2007/13, Cardiff University, Cardiff Business School, Economics Section. [Downloadable!]
    Other versions:
  3. Mark A. Wynne, 2008. "Core inflation: a review of some conceptual issues," Review, Federal Reserve Bank of St. Louis, issue May, pages 205-228. [Downloadable!]
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  4. Alexandra Heath & Ivan Roberts & Tim Bulman, 2004. "Inflation in Australia: Measurement and Modelling," RBA Annual Conference Volume, in: Christopher Kent & Simon Guttmann (ed.), The Future of Inflation Targeting Reserve Bank of Australia. [Downloadable!]
  5. Jamie Armour, 2006. "An Evaluation of Core Inflation Measures," Working Papers 06-10, Bank of Canada. [Downloadable!]
  6. Michael Pedersen, 2006. "An Alternative Measure of Core Inflation," Working Papers Central Bank of Chile 366, Central Bank of Chile. [Downloadable!]
  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!]
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