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The Common Component of CPI: An Alternative Measure of Underlying Inflation for Canada

Author

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  • Mikael Khan
  • Louis Morel
  • Patrick Sabourin

Abstract

In this paper, the authors propose a measure of underlying inflation for Canada obtained from estimating a monthly factor model on individual components of the CPI. This measure, labelled the common component of CPI, has intuitive appeal and a number of interesting features. In particular, it is not affected by sector-specific price movements that can distort the signal in many other measures of underlying inflation, and appears to capture price movements that are indicative of aggregate demand fluctuations in the Canadian economy. This indicator may serve as a useful complement to existing measures of underlying inflation monitored by the Bank of Canada.

Suggested Citation

  • 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.
  • Handle: RePEc:bca:bocawp:13-35
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    References listed on IDEAS

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    Cited by:

    1. Bjarni G. Einarsson, 2014. "A Dynamic Factor Model for Icelandic Core Inflation," Economics wp67, Department of Economics, Central bank of Iceland.

    More about this item

    Keywords

    Business fluctuations and cycles; Econometric and statistical methods; Inflation and prices; Monetary policy framework;

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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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