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Core inflation: a critical guide

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  • Alan Mankikar
  • Jo Paisley

Abstract

The term 'core inflation' is widely used by academics and central bankers. But despite its prevalence, there is neither a commonly accepted theoretical definition nor an agreed method of measuring it. The range of conceptual bases is potentially confusing, and can make the large number of available measures of core inflation difficult to interpret, particularly when they display different trends. Nevertheless, measures of core inflation can be helpful if they increase the signal to noise ratio in measured inflation. This paper examines a range of measures of core inflation for the United Kingdom, both conceptually and empirically, setting out their motivation and highlighting their potential limitations. No single measure performs well across the board, but a compromise conclusion on the usefulness of measures of core inflation is that each one may provide a different insight into the inflation process. There can be value in looking at a range of measures, as long as one bears in mind what information each type of indicator is best at providing. When all measures are giving the same message then, in a sense, monetary policy makers can reasonably consider that these measures are providing a reliable guide to inflationary pressures. It is when the measures start to diverge that policymakers need to take a much closer look at the reasons for those divergences.

Suggested Citation

  • Alan Mankikar & Jo Paisley, 2004. "Core inflation: a critical guide," Bank of England working papers 242, Bank of England.
  • Handle: RePEc:boe:boeewp:242
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    File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2004/WP242.pdf
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    References listed on IDEAS

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    Cited by:

    1. Bilke, Laurent & Stracca, Livio, 2007. "A persistence-weighted measure of core inflation in the Euro area," Economic Modelling, Elsevier, vol. 24(6), pages 1032-1047, November.

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