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Underlying Inflation and the Distribution of Price Change: Evidence from the Japanese Trimmed-Mean CPI

  • Mio, Hitoshi

    (Bank of Japan)

  • Higo, Masahiro

    (Bank of Japan)

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    In this paper, we analyze the use of the trimmed-mean Consumer Price Index (trimmed CPI) as a measure of underlying inflation. We focus on empirical evidence that the cross-sectional price change distribution often but temporarily skews extremely to each side and that large but temporary variations in inflation correspond to the occurrence of the skewness. We find that the skewness of the distribution is mainly caused by idiosyncratic, temporary relative price shocks and that the components which contribute to the skewness of the distribution shift from time to time. Trimming 15 percent from each tail of the cross-sectional price change distribution systematically mitigates the fluctuation of the price index related to broad-based temporary relative price shocks. Thus, the trimmed CPI can be regarded as more appropriate for identifying underlying inflation compared with the CPI excluding fresh foods (CPI ex. fresh foods), which is generally regarded as the "core inflation index" in Japan. Distinguishing temporary price variations and underlying inflation using a measure of the skewness of the price change distribution provides central banks with increased information for evaluations of prior policies and present price developments, and for predictions of future inflation.

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    File URL: http://www.imes.boj.or.jp/research/papers/english/me17-1-4.pdf
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    Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.

    Volume (Year): 17 (1999)
    Issue (Month): 1 (May)
    Pages: 103-132

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    Handle: RePEc:ime:imemes:v:17:y:1999:i:1:p:103-132
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