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

Author

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  • Mio, Hitoshi

    (Bank of Japan)

  • Higo, Masahiro

    (Bank of Japan)

Abstract

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.

Suggested Citation

  • Mio, Hitoshi & Higo, Masahiro, 1999. "Underlying Inflation and the Distribution of Price Change: Evidence from the Japanese Trimmed-Mean CPI," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 17(1), pages 103-132, May.
    • Handle: RePEc:ime:imemes:v:17:y:1999:i:1:p:103-132
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    Citations

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    Cited by:

    1. Andrade, Isabel & O'Brien, Raymond, 2007. "A measure of core inflation in the UK," Discussion Paper Series In Economics And Econometrics 0708, Economics Division, School of Social Sciences, University of Southampton.
    2. Kota Watanabe & Tsutomu Watanabe, 2014. "We construct a Törnqvist daily price index using Japanese point of sale (POS) scannerdata spanning from 1988 to 2013. We find the following. First, the POS based inflation rate tends to be about 0.5 ," CARF F-Series CARF-F-342, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    3. 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.
    4. Koji Takahashi, 2016. "TIPS: The Trend Inflation Projection System and Estimation Results," Bank of Japan Working Paper Series 16-E-18, Bank of Japan.
    5. Shiratsuka, Shigenori, 2001. "Is There a Desirable Rate of Inflation? A Theoretical and Empirical Survey," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(2), pages 49-83, May.
    6. Kota Watanabe & Tsutomu Watanabe, 2014. "Estimating Daily Inflation Using Scanner Data: A Progress Report," UTokyo Price Project Working Paper Series 020, University of Tokyo, Graduate School of Economics.
    7. Luc Aucremanne, 2000. "The use of robust estimators as measures of core inflation," Working Paper Research 02, National Bank of Belgium.
    8. Pelin Berkmen, 2002. "Measuring Core Inflation for Turkey - Trimmed Means Approach," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 2(2), pages 1-18.
    9. Shigenori Shiratsuka, 2001. "Asset prices, financial stability and monetary policy: based on Japan’s experience of the asset price bubble," BIS Papers chapters, in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 261-284, Bank for International Settlements.
    10. Mio, Hitoshi, 2002. "Identifying Aggregate Demand and Aggregate Supply Components of Inflation Rate: A Structural Vector Autoregression Analysis for Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 20(1), pages 33-56, January.

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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