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Core Inflation

  • Hogan, Seamus
  • Marianne Johnson
  • Thérèse Laflèche

The Bank of Canada uses core CPI inflation, the year-over-year rate of change of the consumer price index excluding food, energy, and the effects of changes in indirect taxes, as the operational guide for monetary policy. In this report we study the concept and measurement of core or underlying inflation more generally by examining several alternative measures of core inflation, from the viewpoint that core inflation is a tool for policy purposes, either as an indicator of current and future trends in inflation, or as a viable target for monetary policy. A simple model of price determination is proposed that defines the core conceptually, and illustrates the process by which aggregate inflation rates may differ from the core. As a measure of inflation for policy purposes, core inflation is useful to the extent that it can be measured accurately. Therefore, following a discussion of conceptual issues, the report's focus narrows and we introduce the various measures of core inflation, concluding with a comparative evaluation of those measures. We find the alternatives quite similar in many respects. However, a closer assessment based on their suitability to various policy purposes suggests that different measures do well along different dimensions.

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File URL: http://www.bankofcanada.ca/en/res/tr/2001/tr89.pdf
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Paper provided by Bank of Canada in its series Technical Reports with number 89.

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Length: 69 pages
Date of creation: 2001
Date of revision:
Handle: RePEc:bca:bocatr:89
Contact details of provider: Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada
Phone: 613 782-8845
Fax: 613 782-8874
Web page: http://www.bank-banque-canada.ca/

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  1. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
  2. Michael F. Bryan & Stephen G. Cecchetti & Rodney L. Wiggins II, 1997. "Efficient Inflation Estimation," NBER Working Papers 6183, National Bureau of Economic Research, Inc.
  3. Hilde Christiane Bjørnland, 1997. "Estimating Core Inflation - The Role of Oil Price Shocks and Imported Inflation," Discussion Papers 200, Statistics Norway, Research Department.
  4. Jeffrey J. Hallman & Richard D. Porter & David H. Small, 1989. "M2 per unit of potential GNP as an anchor for the price level," Staff Studies 157, Board of Governors of the Federal Reserve System (U.S.).
  5. Michael F. Bryan & Christopher J. Pike, 1991. "Median price changes: an alternative approach to measuring current monetary inflation," Economic Commentary, Federal Reserve Bank of Cleveland, issue Dec.
  6. Ball, L. & Mankiw, G.H., 1992. "Relative-Price Change as Aggregate Supply Shocks," Harvard Institute of Economic Research Working Papers 1609, Harvard - Institute of Economic Research.
  7. Stephen G. Cecchetti, 1997. "Measuring short-run inflation for central bankers," Review, Federal Reserve Bank of St. Louis, issue May, pages 143-155.
  8. Michael F. Bryan & Stephen G. Cecchetti, 1999. "Inflation And The Distribution Of Price Changes," The Review of Economics and Statistics, MIT Press, vol. 81(2), pages 188-196, May.
  9. Laurence Ball, 1997. "Efficient Rules for Monetary Policy," NBER Working Papers 5952, National Bureau of Economic Research, Inc.
  10. St-Amant, Pierre & Tessier, David, 1998. "Résultats empiriques multi-pays relatifs à l'impact des cibles d'inflation sur la crédibilité de la politique monétaire," Working Papers 98-23, Bank of Canada.
  11. Quah, Danny, 1995. "Measuring Core Inflation," CEPR Discussion Papers 1153, C.E.P.R. Discussion Papers.
  12. Michael F. Bryan & Stephen G. Cecchetti, 1993. "The Consumer Price Index as a Measure of Inflation," NBER Working Papers 4505, National Bureau of Economic Research, Inc.
  13. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-53, October.
  14. Thérèse Laflèche, 1997. "Mesures du taux d'inflation tendanciel," Working Papers 97-9, Bank of Canada.
  15. Scott Roger, 1998. "Core inflation: concepts, uses and measurement," Reserve Bank of New Zealand Discussion Paper Series G98/9, Reserve Bank of New Zealand.
  16. Danny Quah & Danny Quah & Shaun P. Vahey, 1995. "Measuring Core Inflation," CEP Discussion Papers dp0254, Centre for Economic Performance, LSE.
  17. Nicholas Ricketts & David Rose, . "Inflation, Learning And Monetary Policy Regimes In The G-7 Economies," Working Papers 95-6, Bank of Canada.
  18. Christine Gartner & Gert Wehinger, 1998. "Core Inflation in Selected European Union Countries," Working Papers 33, Oesterreichische Nationalbank (Austrian Central Bank).
  19. Armour, J. & Atta-Mensah, J. & Engert, W. & Hendry, S., 1996. "A Distant-Early-Warning Model of Inflation Based on M1 Disequilibria," Working Papers 96-5, Bank of Canada.
  20. Atta-Mensah, J, 1996. "A Modified P*-Model of Inflation Based on M1," Working Papers 96-15, Bank of Canada.
  21. Rowe, Nicholas & Yetman, James, 2000. "Identifying Policy-makers' Objectives: An Application to the Bank of Canada," Working Papers 00-11, Bank of Canada.
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