Component-smoothed Inflation: Estimating the Persistent Component of Inflation in Real Time
AbstractThis paper presents a new measure of underlying inflation: component-smoothed inflation. It approaches the problem of determining underlying inflation from a different direction than previous methods. Rather than excluding or trimming out volatile CPI items, it smoothes components of the CPI based on their volatility – CPI expenditure weights are maintained for all items. Items such as rent are smoothed a little, if at all, while volatile series such as fruit, vegetables and automotive fuel are smoothed a lot. This removes much of the temporary volatility in the CPI while retaining most of the persistent signal. Because our underlying inflation measure includes all CPI items at all times, it is robust to sustained relative price changes and is unbiased in the long run. A potential cost of this approach is that, unlike other measures, it places weight on lagged as well as contemporaneous prices for volatile series. An evaluation of the balance between the costs and benefits of this approach remains an open question.
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Bibliographic InfoPaper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2006-11.
Date of creation: Dec 2006
Date of revision:
Find related papers by JEL classification:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-01-13 (All new papers)
- NEP-CBA-2007-01-13 (Central Banking)
- NEP-MAC-2007-01-13 (Macroeconomics)
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- Alan K. Detmeister, 2011. "The usefulness of core PCE inflation measures," Finance and Economics Discussion Series 2011-56, Board of Governors of the Federal Reserve System (U.S.).
- repec:nzb:nzbbul:mar2013:01 is not listed on IDEAS
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