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A combined measure of UK core inflation estimates

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  • Hyeon-Seung Huh
  • Hyun-Hoon Lee

Abstract

This article estimates UK core inflation in a structural Vector Autoregression (VAR) framework. While building on the work of Quah and Vahey (1995), we extend their two-variable VAR model to allow for different dynamics depending on the nature of the shocks that potentially influence the process of core inflation. We also construct a combined measure of core inflation estimates on the basis of their reliabilities. Empirical evidence shows that the new measures demonstrate marked improvement in their eligibility to serve as core inflation estimators. Furthermore, the combined measure is shown to perform best. It appears that the conventional core measures such as the retail prices excluding mortgage interest payments (RPIX) and the Harmonized Index of Consumer Prices (HICP) inflation series are not successful in capturing the underlying trend of inflation, casting some doubt on their current use in the making of monetary policy decisions.

Suggested Citation

  • Hyeon-Seung Huh & Hyun-Hoon Lee, 2011. "A combined measure of UK core inflation estimates," Applied Economics, Taylor & Francis Journals, vol. 43(18), pages 2331-2341.
  • Handle: RePEc:taf:applec:v:43:y:2011:i:18:p:2331-2341
    DOI: 10.1080/00036840903194196
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    References listed on IDEAS

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    1. Mark A. Wynne, 2008. "Core inflation: a review of some conceptual issues," Review, Federal Reserve Bank of St. Louis, issue May, pages 205-228.
    2. Hasan Bakhshi & Tony Yates, 1999. "To trim or not to trim? An application of a trimmmed mean inflation estimator to the United Kingdom," Bank of England working papers 97, Bank of England.
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