The Concept and Measurement of Underlying Inflation

For the conduct of monetary policy, it is important to grasp "underlying inflation" by excluding temporary factors that are expected to wane over time. However, because underlying inflation cannot be determined using developments in a single indicator alone, the Bank of Japan uses three sets of approaches to gauge it: (1) approaches that exclude highly volatile items, (2) approaches that capture medium- to long-term inflation expectations, and (3) approaches that estimate underlying inflation based on economic models. Looking ahead at price developments, while underlying inflation is approaching 2 percent, consumer prices are expected to become more volatile in the short term due to factors such as government measures to address rising prices as well as rising crude oil costs stemming from heightened tensions in the Middle East. In light of these factors, it has become even more important to accurately grasp underlying inflation and provide clear communication.