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Underlying Inflation in Australia: Are the Existing Measures Satisfactory?

  • ROBERT DIXON
  • G.C. LIM

A number of measures of the underlying rate of inflation are reported for Australia. We formulate criteria that an acceptable underlying rate must satisfy and then test to see whether any of the current measures satisfy these criteria. We find that for the period since inflation targeting began, none of the underlying series satisfy all criteria. We then examine the results of an 'Unobserved Components' decomposition and show that it not only provides useful information on underlying inflation in Australia, but also provides support for the decision, in 1998, of the Reserve Bank of Australia to switch the target from an underlying series to the headline rate itself. Copyright © 2004 Economic Society of Australia..

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Article provided by The Economic Society of Australia in its journal The Economic Record.

Volume (Year): 80 (2004)
Issue (Month): 251 (December)
Pages: 373-386

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Handle: RePEc:bla:ecorec:v:80:y:2004:i:251:p:373-386
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  1. Guy Debelle, 1997. "Inflation Targeting in Practice," IMF Working Papers 97/35, International Monetary Fund.
  2. 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.
  3. James C. Morley & Charles R. Nelson & Eric Zivot, 2003. "Why Are the Beveridge-Nelson and Unobserved-Components Decompositions of GDP So Different?," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 235-243, May.
  4. James C. Morley & Charles Nelson & Eric Zivot, 2000. "Why Are Beveridge-Nelson and Unobserved-Component Decompositions of GDP So Different?," Working Papers 0013, University of Washington, Department of Economics.
  5. Morley, James C., 2002. "A state-space approach to calculating the Beveridge-Nelson decomposition," Economics Letters, Elsevier, vol. 75(1), pages 123-127, March.
  6. Carlos Robalo Marques & Pedro Duarte Neves & Afonso Gonçalves da Silva, 2000. "Why Should Central Banks Avoid the Use of the Underlying Inflation Indicator?," Working Papers w200005, Banco de Portugal, Economics and Research Department.
  7. Freeman, Donald G., 1998. "Do core inflation measures help forecast inflation?," Economics Letters, Elsevier, vol. 58(2), pages 143-147, February.
  8. Peter C.B. Phillips & Sam Ouliaris, 1987. "Asymptotic Properties of Residual Based Tests for Cointegration," Cowles Foundation Discussion Papers 847R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1988.
  9. Pedro Duarte Neves & Luís Morais Sarmento & Carlos Robalo Marques, 1999. "Evaluating core inflation indicators," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
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