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Underlying Inflation: Concepts, Measurement and Performance

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Author Info
Ivan Roberts (Reserve Bank of Australia)
Abstract

This paper explores the concept of underlying inflation and the properties of various measures of underlying inflation in the Australian context. Underlying inflation measures are routinely calculated and monitored by central banks in many countries, including the Reserve Bank of Australia. Alternative measurement concepts are explored, and a range of measures that have been calculated for Australia are discussed and evaluated on the basis of statistical criteria. These criteria capture the intuition that a good measure of underlying inflation should be less volatile than CPI (or headline) inflation, be unbiased with respect to CPI inflation, and capture the 'trend' in CPI inflation so that, on average, CPI inflation will tend to adjust towards the measure of underlying inflation. In the Australian context, statistical measures of underlying inflation, such as the trimmed mean or weighted median, perform fairly satisfactorily against these criteria. The performance of these measures can be further improved by seasonally adjusting prices at the CPI component level. Although underlying inflation measures have become less necessary in the past decade as inflation itself has become less volatile, these findings suggest that underlying inflation measures can still add value to the analysis of inflationary trends.

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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2005-05.

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Date of creation: Jul 2005
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Handle: RePEc:rba:rbardp:rdp2005-05

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Related research
Keywords: underlying inflation; core inflation; trimmed mean; weighted median; volatility-weighted measures;

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Find related papers by JEL classification:
C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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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. Mark A. Wynne, 1999. "Core inflation: a review of some conceptual issues," Working Paper Series 5, European Central Bank. [Downloadable!]
    Other versions:
  2. Aucremanne, L., 2000. "The Use of Robust Estimators as Measures of Core Inflation," Papers 2, Warwick - Development Economics Research Centre.
  3. Luc Aucremanne, 2000. "The use of robust estimators as measures of core inflation," Research series 200003-2, National Bank of Belgium. [Downloadable!]
  4. Stephen G. Cecchetti & Guy Debelle, 2006. "Has the inflation process changed?," Economic Policy, CEPR, CES, MSH, vol. 21(46), pages 311-352, 04. [Downloadable!] (restricted)
    Other versions:
  5. Robert Dixon & G.C. Lim, 2004. "Underlying Inflation in Australia: Are the Existing Measures Satisfactory?," The Economic Record, The Economic Society of Australia, vol. 80(251), pages 373-386, December. [Downloadable!] (restricted)
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  6. 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:
  7. Juan-Luis Vega & Mark A. Wynne, 2003. "A First Assessment of Some Measures of Core Inflation for the Euro Area," German Economic Review, Blackwell Publishing, vol. 4, pages 269-306, 08. [Downloadable!] (restricted)
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  8. 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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  9. Hogan, Seamus & Marianne Johnson & Thérèse Laflèche, 2001. "Core Inflation," Technical Reports 89, Bank of Canada. [Downloadable!]
  10. Clements, Kenneth W & Izan, H Y, 1987. "The Measurement of Inflation: A Stochastic Approach," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(3), pages 339-50, July.
  11. 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)
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  12. Diewert, W.E., 1995. "On the Stochastic Approach to Index Numbers," UBC Departmental Archives 95-31, UBC Department of Economics.
  13. Bryan, Michael-F & Cecchetti, Stephen-G, 1999. "The Monthly Measurement of Core Inflation in Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 17(1), pages 77-101, May. [Downloadable!]
  14. Jonathan Kearns, 1998. "The Distribution and Measurement of Inflation," RBA Research Discussion Papers rdp9810, Reserve Bank of Australia. [Downloadable!]
  15. Thérèse Laflèche, 1997. "Statistical measures of the trend rate of inflation," Bank of Canada Review, Bank of Canada, vol. 1997(Autumn), pages 29-47. [Downloadable!]
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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. Andrew Stone & Troy Wheatley & Louise Wilkinson, 2005. "A Small Model of the Australian Macroeconomy: An Update," RBA Research Discussion Papers rdp2005-11, Reserve Bank of Australia. [Downloadable!]
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