Alternative Measures of Core Inflation in Chile
Inflation targeting central banks usually base their objectives on headline inflation, which is often affected by price movements of specific components whose behavior makes it difficult to extract clear signals about the inflationary outlook relevant for the monetary policy horizon. For this reason, several measures of underlying (core) inflation have been proposed with the purpose of removing this “noise”. This paper presents some alternatives calculated for the Chilean economy: three different measures that trim CPI components according to criteria of price changes and volatility, and two measures that re-weight the components according to historical volatility. In general terms, we find that the measures trimming away items with extreme price changes or high volatility are informative about the inflationary outlook given that they are unbiased with respect to the seasonally adjusted CPI and superior to other measures in tracking the headline inflation trend.
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