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Testing an Interpretation of Core Inflation Measures in New Zealand

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Abstract

The Reserve Bank of New Zealand uses a range of core inflation inflation measures in order to assess the underlying inflationary pressures. One definition of core inflation is that it represents the level of inflation to which headline inflation converges to in the future. This definition is similar to the idea of trend inflation. We build on this definition, by specifying an econometric test to evaluate which of the Reserve Bank’s core inflation measures are a good gauge of underlying inflation pressures and possess properties similar to trend inflation. According to the test, the sectoral factor model and CPI inflation excluding food and energy are, among the Bank’s current suite of measures, most consistent against this definition. We interpret our result as suggesting either of these measures as being reasonable approximation for where one might expect the level of headline inflation to converge to at a sufficiently long horizon.

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  • Günes Kamber & Benjamin Wong, 2016. "Testing an Interpretation of Core Inflation Measures in New Zealand," Reserve Bank of New Zealand Analytical Notes series AN2016/06, Reserve Bank of New Zealand.
    • Handle: RePEc:nzb:nzbans:2016/06
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    1. James H. Stock & Mark W. Watson, 2016. "Core Inflation and Trend Inflation," The Review of Economics and Statistics, MIT Press, vol. 98(4), pages 770-784, October.
    2. Michael F. Bryan & Stephen G. Cecchetti, 1994. "Measuring Core Inflation," NBER Chapters, in: Monetary Policy, pages 195-219, National Bureau of Economic Research, Inc.
    3. Joshua C. C. Chan & Gary Koop & Simon M. Potter, 2013. "A New Model of Trend Inflation," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 31(1), pages 94-106, January.
    4. Gael Price, 2013. "Some revisions to the sectoral factor model of core inflation," Reserve Bank of New Zealand Analytical Notes series AN2013/06, Reserve Bank of New Zealand.
    5. Satish Ranchhod, 2013. "Measures of New Zealand core inflation," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 76, pages 3-11, March.
    6. Cogley, Timothy, 2002. "A Simple Adaptive Measure of Core Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 94-113, February.
    7. 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.
    8. Domenico Giannone & Troy D. Matheson, 2007. "A New Core Inflation Indicator for New Zealand," International Journal of Central Banking, International Journal of Central Banking, vol. 3(4), pages 145-180, December.
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