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Core Inflation

Author

Listed:
  • Hogan, Seamus
  • 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

  • Hogan, Seamus & Marianne Johnson & Thérèse Laflèche, 2001. "Core Inflation," Technical Reports 89, Bank of Canada.
  • Handle: RePEc:bca:bocatr:89
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    File URL: http://www.bankofcanada.ca/en/res/tr/2001/tr89.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Mikael Khan & Louis Morel & Patrick Sabourin, 2013. "The Common Component of CPI: An Alternative Measure of Underlying Inflation for Canada," Staff Working Papers 13-35, Bank of Canada.
    2. Alexandra Heath & Ivan Roberts & Tim Bulman, 2004. "Inflation in Australia: Measurement and Modelling," RBA Annual Conference Volume,in: Christopher Kent & Simon Guttmann (ed.), The Future of Inflation Targeting Reserve Bank of Australia.
    3. Mick Silver, 2006. "Core Inflation Measures and Statistical Issues in Choosing Among Them," IMF Working Papers 06/97, International Monetary Fund.
    4. Jamie Armour, 2006. "An Evaluation of Core Inflation Measures," Staff Working Papers 06-10, Bank of Canada.
    5. da Silva Filho, Tito Nícias Teixeira & Figueiredo, Francisco Marcos Rodrigues, 2011. "Has Core Inflation Been Doing a Good Job in Brazil?," Revista Brasileira de Economia - RBE, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 65(2), June.
    6. Dowd, Kevin & Cotter, John & Loh, Lixia, 2011. "U.S. Core Inflation: A Wavelet Analysis," Macroeconomic Dynamics, Cambridge University Press, vol. 15(04), pages 513-536, September.
    7. Michael Pedersen, 2009. "An Alternative Core Inflation Measure," German Economic Review, Verein für Socialpolitik, vol. 10, pages 139-164, May.
    8. Alan K. Detmeister, 2012. "What should core inflation exclude?," Finance and Economics Discussion Series 2012-43, Board of Governors of the Federal Reserve System (U.S.).
    9. Ariño, Miguel A. & Canela, Miguel A., 2002. "Evolución de la inflación en España," IESE Research Papers D/446, IESE Business School.
    10. Amstad, Marlene & Potter, Simon M. & Rich, Robert W., 2014. "The FRBNY staff underlying inflation gauge: UIG," Staff Reports 672, Federal Reserve Bank of New York.
    11. Hoda Abdel-Ghaffar Yousse, 2007. "Towards Inflation Targeting in Egypt: Fiscal and institutional reforms to support disinflation efforts," European Economy - Economic Papers 2008 - 2015 288, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    12. Ivan Roberts, 2005. "Underlying Inflation: Concepts, Measurement and Performance," RBA Research Discussion Papers rdp2005-05, Reserve Bank of Australia.
    13. Gordon Wilkinson, 2011. "The Behaviour of Consumer Prices Across Provinces," Discussion Papers 11-2, Bank of Canada.
    14. Snudden, Stephen, 2016. "Cyclical fiscal rules for oil-exporting countries," Economic Modelling, Elsevier, vol. 59(C), pages 473-483.
    15. Martha Misas A>rango & Enrique López Enciso & Juana Téllez Corredor & José Fernando Escobar Restrepo, 2005. "La Inflación Subyacente En Colombia: Un Enfoque De Tendencias Estocásticas Comunes Asociadas A Un Vec Estructural," BORRADORES DE ECONOMIA 003026, BANCO DE LA REPÚBLICA.
    16. Todd E. Clark, 2001. "Comparing measures of core inflation," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-31.
    17. Piotr Wiesiolek & Anna Kosior, 2010. "To what extent can we trust core inflation measures? The experience of CEE countries," BIS Papers chapters,in: Bank for International Settlements (ed.), Measurement of inflation and the Philippine monetary policy framework, volume 49, pages 297-323 Bank for International Settlements.
    18. Robert W. Rich & Charles Steindel, 2007. "A comparison of measures of core inflation," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 19-38.
    19. Marlene Amstad & Simon M. Potter, 2009. "Real time underlying inflation gauges for monetary policymakers," Staff Reports 420, Federal Reserve Bank of New York.
    20. Colin Bermingham, 2007. "How Useful is Core Inflation for Forecasting Headline Inflation?," The Economic and Social Review, Economic and Social Studies, vol. 38(3), pages 355-377.
    21. Robert W. Rich & Charles Steindel, 2005. "A review of core inflation and an evaluation of its measures," Staff Reports 236, Federal Reserve Bank of New York.
    22. Gagik G. Aghajanyan, 2005. "Core inflation in a small transition country: choice of optimal measures," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 2(1), pages 83-110, June.
    23. Kevin Clinton, 2006. "Core inflation at the Bank of Canada: A critique," Working Papers 1077, Queen's University, Department of Economics.
    24. Bermingham, Colin, 2006. "How Useful is Core Inflation for Forecasting Headline Inflation?," Research Technical Papers 11/RT/06, Central Bank of Ireland.

    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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