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Component-smoothed Inflation: Estimating the Persistent Component of Inflation in Real Time

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Author Info

  • Christian Gillitzer

    (Reserve Bank of Australia)

  • John Simon

    (Reserve Bank of Australia)

Abstract

This 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 Info

Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2006-11.

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Date of creation: Dec 2006
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Handle: RePEc:rba:rbardp:rdp2006-11

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Related research

Keywords: CPI; core inflation; underlying inflation; Australia; United States;

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References

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  1. Joanne Cutler, 2001. "Core Inflation in the UK," Discussion Papers 03, Monetary Policy Committee Unit, Bank of England.
  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. Ivan Roberts, 2005. "Underlying Inflation: Concepts, Measurement and Performance," RBA Research Discussion Papers rdp2005-05, Reserve Bank of Australia.
  4. 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.
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Cited by:
  1. 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.
  2. 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.).

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