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The Distribution and Measurement of Inflation

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Author Info
Jonathan Kearns (Reserve Bank of Australia)

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Abstract

Measured inflation records many shocks that are not representative of the persistent component of inflation. Several methods are used to construct measures of core inflation which abstract from these unrepresentative shocks; this paper focuses on trimmed means. Analysis of Australian CPI component price changes shows they are widely dispersed. Further, they are not normally distributed; there is a large proportion of extreme price changes (the distribution is fat-tailed) and the distribution is usually positively skewed. With an understanding of the behaviour of price changes, trimmed means are then developed. It is found that trimmed means provide a better measure of trend, or core, inflation when a large proportion of the distribution is removed. As a consequence of the distribution's systematic positive skew, slightly more than half of the trim should be taken from the left-hand tail to ensure that the trimmed mean records average inflation equal to that of the whole CPI.

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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp9810.

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Date of creation: Sep 1998
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Handle: RePEc:rba:rbardp:rdp9810

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Related research
Keywords: core inflation; permanent/transitory shocks to inflation; moments of distribution of price changes;

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Find related papers by JEL classification:
C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

Cited by:
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  1. Mick Silver, 2006. "Core Inflation Measures and Statistical Issues in Choosing Among Them," IMF Working Papers 06/97, International Monetary Fund. [Downloadable!]
  2. Jamie Armour, 2006. "An Evaluation of Core Inflation Measures," Working Papers 06-10, Bank of Canada. [Downloadable!]
  3. Lei Lei Song, 2003. "The Role of the Unit of Analysis in Tax Policy Reform Evaluations," Melbourne Institute Working Paper Series wp2003n29, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne. [Downloadable!]
  4. Robert Dixon & Guay Lim, 2003. "Underlying Inflation in Australia: Are the Existing Measures Satisfactory?," Department of Economics - Working Papers Series 878, The University of Melbourne. [Downloadable!]
    Other versions:
  5. Chris Aylmer & Troy Gill, 2003. "Business Surveys and Economic Activity," RBA Research Discussion Papers rdp2003-01, Reserve Bank of Australia. [Downloadable!]
  6. Juan Luis Vega-Croissier & Mark A. Wynne, 2001. "An evaluation of some measures of core inflation for the euro area," Working Paper Series 053, European Central Bank. [Downloadable!]
  7. L. Aucremanne, 2001. "The use of Robust Estimators as Measures of Core Inflation," DNB Staff Reports (discontinued) 61, Netherlands Central Bank. [Downloadable!]
  8. Colin Bermingham, 2007. "How Useful is Core Inflation for Forecasting Headline Inflation?," The Economic and Social Review, Economic and Social Studies, vol. 38(3), pages 355–377. [Downloadable!]
  9. Bermingham, Colin, 2006. "How Useful is Core Inflation for Forecasting Headline Inflation?," Research Technical Papers 11/RT/06, Central Bank & Financial Services Authority of Ireland (CBFSAI). [Downloadable!]
  10. Meyler, Aidan, 1999. "A statistical measure of core inflation," MPRA Paper 11362, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  11. Juan-Luis Vega & Mark A. Wynne, 2002. "A first assessment of some measures of core inflation for the euro area," Working Papers 02 05, Federal Reserve Bank of Dallas. [Downloadable!]
    Other versions:
  12. Ivan Roberts, 2005. "Underlying Inflation: Concepts, Measurement and Performance," RBA Research Discussion Papers rdp2005-05, Reserve Bank of Australia. [Downloadable!]
  13. Luc Aucremanne & Guy Brys & Mia Hubert & Peter J. Rousseeuw & Anja Struyf, 2002. "Inflation, relative prices and nominal rigidities," Research series 200205-1, National Bank of Belgium. [Downloadable!]
    Other versions:
  14. Jacqueline Dwyer & Kenneth Leong, 2000. "Nominal Wage Rigidity in Australia," RBA Research Discussion Papers rdp2000-08, Reserve Bank of Australia. [Downloadable!]
  15. Landau, Bettina, 2000. "Core inflation rates: A comparison of methods based on west German data," Discussion Paper Series 1: Economic Studies 2000,04, Deutsche Bundesbank, Research Centre. [Downloadable!]
  16. Luc Aucremanne, 2000. "The use of robust estimators as measures of core inflation," Research series 200003-2, National Bank of Belgium. [Downloadable!]
  17. Lei Lei Song, 2005. "Do underlying measures of inflation outperform headline rates? Evidence from Australian data," Applied Economics, Taylor and Francis Journals, vol. 37(3), pages 339-345, February. [Downloadable!] (restricted)
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