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Underlying Inflation in Australia: Are the Existing Measures Satisfactory?

  • Robert Dixon
  • Guay Lim

Along with a number of other central banks around the world the Reserve Bank of Australia has quite explicitly adopted an inflation target. Both the Bank and the Australian Government’s statistical agency (the Australian Bureau of Statistics) report various measures of the underlying rate of inflation. The aim of this paper is to formulate criteria which an acceptable underlying rate must satisfy and then test to see whether either individually or in combination any of the current (CPI Excluding volatile items; CPI Market prices excluding volatile items; Weighted median and; Trimmed mean) or recently discarded (the Treasury underlying rate) measures of underlying inflation satisfy these criteria. We find that for the period since inflation targeting began (in 1993) none of these underlying series satisfy all of the criteria we propose but that one series (the RBA’s Trimmed mean series) does satisfy the sub-set which we refer to as our ‘necessary criteria’. We then examine the results of an ‘Unobserved Components’ decomposition and argue that it provides useful information on underlying inflation in Australia. JEL Codes E31, C4 Keywords:

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Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 878.

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Length: 41 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:mlb:wpaper:878
Contact details of provider: Postal: Department of Economics, The University of Melbourne, 4th Floor, FBE Building, Level 4, 111 Barry Street. Victoria, 3010, Australia
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  1. Freeman, Donald G., 1998. "Do core inflation measures help forecast inflation?," Economics Letters, Elsevier, vol. 58(2), pages 143-147, February.
  2. James C. Morley & Charles Nelson & Eric Zivot, 2000. "Why Are Beveridge-Nelson and Unobserved-Component Decompositions of GDP So Different?," Discussion Papers in Economics at the University of Washington 0013, Department of Economics at the University of Washington.
  3. Robalo Marques, Carlos & Duarte Neves, Pedro & Morais Sarmento, Luis, 2003. "Evaluating core inflation indicators," Economic Modelling, Elsevier, vol. 20(4), pages 765-775, July.
  4. Carlos Robalo Marques & Pedro Duarte Neves & Afonso Gonçalves da Silva, 2000. "Why Should Central Banks Avoid the Use of the Underlying Inflation Indicator?," Working Papers w200005, Banco de Portugal, Economics and Research Department.
  5. Guy Debelle, 1998. "Inflation Targeting in Practice," Occasional Papers, South East Asian Central Banks (SEACEN) Research and Training Centre, number occ23.
  6. Morley, James C., 2002. "A state-space approach to calculating the Beveridge-Nelson decomposition," Economics Letters, Elsevier, vol. 75(1), pages 123-127, March.
  7. Timothy Cogley, 1998. "A simple adaptive measure of core inflation," Working Papers in Applied Economic Theory 98-06, Federal Reserve Bank of San Francisco.
  8. James C. Morley & Charles R. Nelson & Eric Zivot, 2003. "Why Are the Beveridge-Nelson and Unobserved-Components Decompositions of GDP So Different?," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 235-243, May.
  9. Phillips, Peter C B & Ouliaris, S, 1990. "Asymptotic Properties of Residual Based Tests for Cointegration," Econometrica, Econometric Society, vol. 58(1), pages 165-93, January.
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