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Core Inflation

Author

Listed:
  • Seamus Hogan
  • Marianne Johnson
  • Thérèse Laflèche

Abstract

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.

Suggested Citation

  • Seamus Hogan & Marianne Johnson & Thérèse Laflèche, 2001. "Core Inflation," Technical Reports 89, Bank of Canada.
  • Handle: RePEc:bca:bocatr:89
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    References listed on IDEAS

    as
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    3. Ball, Laurence, 1999. "Efficient Rules for Monetary Policy," International Finance, Wiley Blackwell, vol. 2(1), pages 63-83, April.
    4. Quah, Danny & Vahey, Shaun P, 1995. "Measuring Core Inflation?," Economic Journal, Royal Economic Society, vol. 105(432), pages 1130-1144, September.
    5. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
    6. 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 829-853, October.
    7. Scott Roger, 1998. "Core inflation: concepts, uses and measurement," Reserve Bank of New Zealand Discussion Paper Series G98/9, Reserve Bank of New Zealand.
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    14. Rowe, Nicholas & Yetman, James, 2000. "Identifying Policy-makers' Objectives: An Application to the Bank of Canada," Staff Working Papers 00-11, Bank of Canada.
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    More about this item

    Keywords

    Inflation and prices;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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