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The Distribution and Measurement of Inflation

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  • Jonathan Kearns

    (Reserve Bank of Australia)

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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Bibliographic Info

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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References

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  1. Michael F. Bryan & Stephen G. Cecchetti, 1993. "Measuring Core Inflation," NBER Working Papers 4303, National Bureau of Economic Research, Inc.
  2. Richard De Abreu Lourenco & David Gruen, 1995. "Price Stickiness and Inflation," RBA Research Discussion Papers rdp9502, Reserve Bank of Australia.
  3. Stanley Fischer, 1981. "Relative Shocks, Relative Price Variability, and Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 381-442.
  4. 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.
  5. Michael F. Bryan & Stephen G. Cecchetti & Rodney L. Wiggins II, 1997. "Efficient inflation estimation," Working Paper 9707, Federal Reserve Bank of Cleveland.
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Cited by:
  1. Andrea Brischetto & Anthony Richards, 2006. "The Performance of Trimmed Mean Measures of Underlying Inflation," RBA Research Discussion Papers rdp2006-10, Reserve Bank of Australia.
  2. Meyler, Aidan, 1999. "A statistical measure of core inflation," MPRA Paper 11362, University Library of Munich, Germany.
  3. Santos, Edward P. & Mapa, Dennis S. & Glindro, Eloisa T., 2011. "Estimating Inflation-at-Risk (IaR) using Extreme Value Theory (EVT)," MPRA Paper 28266, University Library of Munich, Germany.
  4. Vega, Juan Luis & Wynne, Mark A., 2001. "An evaluation of some measures of core inflation for the euro area," Working Paper Series 0053, European Central Bank.
  5. Alexandra Heath & Ivan Roberts & Tim Bulman, 2004. "Inflation in Australia: Measurement and Modelling," RBA Annual Conference Volume, in: Christopher Kent & Simon Guttmann (ed.), The Future of Inflation Targeting Reserve Bank of Australia.
  6. Chris Aylmer & Troy Gill, 2003. "Business Surveys and Economic Activity," RBA Research Discussion Papers rdp2003-01, Reserve Bank of Australia.
  7. Mick Silver, 2006. "Core Inflation Measures and Statistical Issues in Choosing Among them," IMF Working Papers 06/97, International Monetary Fund.
  8. Luc Aucremanne & Guy Brys & Peter J Rousseeuw & Anja Struyf & Mia Hubert, 2003. "Inflation, relative prices and nominal rigidities," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 81-105 Bank for International Settlements.
  9. Juan-Luis Vega & Mark A. Wynne, 2002. "A first assessment of some measures of core inflation for the euro area," Working Papers 0205, Federal Reserve Bank of Dallas.
  10. Bermingham, Colin, 2006. "How Useful is Core Inflation for Forecasting Headline Inflation?," Research Technical Papers 11/RT/06, Central Bank of Ireland.
  11. Gagik G. Aghajanyan, 2005. "Core inflation in a small transition country: choice of optimal measures," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 2(1), pages 83-110, June.
  12. Ivan Roberts, 2005. "Underlying Inflation: Concepts, Measurement and Performance," RBA Research Discussion Papers rdp2005-05, Reserve Bank of Australia.
  13. Dospinescu, Andrei Silviu, 2010. "Measuring Core Inflation in Romania Using the Dobrescu Method – A Comparative Approach," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 308-319, July.

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