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Core Inflation Requiem: Paving the Way for a Dual-Component CPI in FPAS Central Banks

Author

Listed:
  • Shalva Mkhatrishvili

    (Head of Macroeconomics and Statistics Department, National Bank of Georgia)

  • Douglas Laxton

    (NOVA School of Business and Economics, Saddle Point Research, The Better Policy Project)

  • Tamta Sopromadze

    (Head of Monetary Policy Division, National Bank of Georgia)

  • Mariam Tchanturia

    (Macroeconomic Research Division, National Bank of Georgia)

  • Ana Nizharadze

    (Macroeconomic Research Division, National Bank of Georgia)

  • Sergo Gadelia

    (Macroeconomic Research Division, National Bank of Georgia)

  • Giorgi Gigineishvili

    (Macroeconomic Research Division, National Bank of Georgia)

  • Jared Laxton

    (Economist at Advanced Macro Policy Modelling (AMPM))

Abstract

We advocate for a novel approach to decomposing the Consumer Price Index, critiquing the traditional core inflation distinction (which omits volatile items like food and energy) for lacking a solid economic basis. Our proposed method, inspired by practices in economies like the United States, New Zealand and Armenia, categorizes prices into "flexible," which adjust quickly and are influenced by external factors, and "sticky" non-tradables, which adjust more slowly, offering a clearer view of medium-term inflation expectations. This approach underscores the importance of economic analysis over simplistic statistical methods that exclude volatile CPI components. It emphasizes the need for economists to understand the dynamics driving both sticky and flexible price inflation, with the latter often signifying initial signs of excess demand pressures. Recognizing the impact of dollarization, where exchange rate depreciations quickly affect nontraded sticky prices, becomes crucial. This understanding is vital for formulating monetary policies that prevent long-term inflation expectations from escalating, highlighting the significance of studying the interplay between exchange rate movements and domestic price dynamics in dollarized economies.

Suggested Citation

  • Shalva Mkhatrishvili & Douglas Laxton & Tamta Sopromadze & Mariam Tchanturia & Ana Nizharadze & Sergo Gadelia & Giorgi Gigineishvili & Jared Laxton, 2024. "Core Inflation Requiem: Paving the Way for a Dual-Component CPI in FPAS Central Banks," NBG Working Papers 01/2024, National Bank of Georgia.
  • Handle: RePEc:aez:wpaper:2024-01
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Non-tradable sticky prices; Monetary policy credibility; Core inflation;
    All these keywords.

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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