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Core inflation: a critical guide

  • Alan Mankikar
  • Jo Paisley
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    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.

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    File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2004/WP242.pdf
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    Paper provided by Bank of England in its series Bank of England working papers with number 242.

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    Date of creation: Nov 2004
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    Handle: RePEc:boe:boeewp:242
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    1. Mark A. Wynne, 2008. "Core inflation: a review of some conceptual issues," Review, Federal Reserve Bank of St. Louis, issue May, pages 205-228.
    2. Jon Faust & Eric M. Leeper, 1994. "When do long-run identifying restrictions give reliable results?," Working Paper 94-2, Federal Reserve Bank of Atlanta.
    3. Hasan Bakhshi & Tony Yates, 1999. "To trim or not to trim? An application of a trimmmed mean inflation estimator to the United Kingdom," Bank of England working papers 97, Bank of England.
    4. Quah, Danny, 1995. "Measuring Core Inflation," CEPR Discussion Papers 1153, C.E.P.R. Discussion Papers.
    5. Balke, Nathan S. & Wynne, Mark A., 2000. "An equilibrium analysis of relative price changes and aggregate inflation," Journal of Monetary Economics, Elsevier, vol. 45(2), pages 269-292, April.
    6. Laurence Ball & N. Gregory Mankiw, 1993. "Relative-price changes as aggregate supply shocks," Working Papers 93-13, Federal Reserve Bank of Philadelphia.
    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.
    8. Michael F. Bryan & Stephen G. Cecchetti, 1994. "Measuring Core Inflation," NBER Chapters, in: Monetary Policy, pages 195-219 National Bureau of Economic Research, Inc.
    9. C.R. Marques & P.D. Neves & L.M. Sarmento, 2001. "Evaluating Core Inflation," DNB Staff Reports (discontinued) 66, Netherlands Central Bank.
    10. 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.
    11. Michael Woodford, 2001. "Inflation Stabilization and Welfare," NBER Working Papers 8071, National Bureau of Economic Research, Inc.
    12. C.K. Folkertsma & K. Hubrich, 2001. "Performance of core inflation measures," DNB Staff Reports (discontinued) 63, Netherlands Central Bank.
    13. Danny Quah & Danny Quah & Shaun P. Vahey, 1995. "Measuring Core Inflation," CEP Discussion Papers dp0254, Centre for Economic Performance, LSE.
    14. N. Gregory Mankiw, 1994. "Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number greg94-1.
    15. Isabel C. Andrade & Raymond J. O’Brien, 2001. "A Measure of Core Inflation in the UK," Working Papers Department of Economics 2001/05, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
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