IDEAS home Printed from
   My bibliography  Save this book

Price Pressure Measurements for Effective Monetary Policy: Methodology and Issues


  • Vincent Lim Choon Seng


Notwithstanding several shortcomings of CPI, in the SEACEN region as in elsewhere, for pragmatic purpose, the CPI despite its many flaws is universally accepted as a policy target for monetary policy. This is justified if we examine the construction of the consumer price index itself. Even though the CPI is a noisy signal of the inflationary pressures and it may not necessarily be a good measure of the cost of livings but based on a list of criteria needed for a suitable and appropriate index, other measures of price indices do not fare as well. An important question to ask regarding the construction of CPI is whether asset and wage inflation should form an integral part of price pressure measurement. The study duly notes that it may be problematic for the authorities to implicitly include asset prices in any kind of monetary rules if such prices are highly volatile. However, bearing in mind that monetary policy action often involves long lags, it needs a forward-looking and pre-emptive dimension. Therefore, central banks need to put in considerable effort in forecasting future economic developments that may include movement of asset prices. The study also notes that the movements of wages and consumer price inflation in selected SEACEN countries show some correlated relationships and this may suggest that policy authorities may want to utilise wage and labor cost variables in forecasting CPI inflation. For effective monetary policy, the study also observes that while the debate on whether to use headline or core inflation has yet to be settled, nevertheless core inflation is a vital mean to be used as an input to policy decisions and it also serves as an important tool for communication strategies with the general public. It is also noted that even though core CPI inflation does not fully reflect price level movements, it makes a good operational inflation target because it is an index, which the monetary authorities can be held accountable. The choice of which index to use depends on what is the current rate of inflation. If inflation rate is already relatively high, it probably does not matter much which index is used to calculate inflation as this is of a secondary concern. However, in a low inflationary environment, as different choice of price measurement can yield difference results, it becomes important to use the appropriate index. Therefore, in order to overcome the limitation of the conventional CPI, superlative indices are highly recommended but as a second best solution, the study strongly suggest customising a family of consumer price indices to ensure different CPIs are aptly used for different purposes.

Suggested Citation

  • Vincent Lim Choon Seng, 2005. "Price Pressure Measurements for Effective Monetary Policy: Methodology and Issues," Research Studies, South East Asian Central Banks (SEACEN) Research and Training Centre, number rp58, April.
  • Handle: RePEc:sea:rstudy:rp58

    Download full text from publisher

    File URL:
    Download Restriction: no

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sea:rstudy:rp58. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Azharin). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.