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Assessing the value of indicators of underlying inflation for monetary policy

Author

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  • Pietro Catte
  • Torsten Sløk

Abstract

This paper considers a number of different measures of core inflation and tries to identify those containing the most useful information about future movements in headline inflation rates over the horizons relevant for monetary policy for the United States, the euro area, Japan, the United Kingdom and Canada. The paper shows that the adjusted indicators do considerably better than the headline rate at determining the underlying inflation trend and, being considerably less volatile, can also be used at higher frequencies to provide more timely information. Most of these indicators also contain information relevant to predicting future headline inflation and which is additional to that contained in the headline rate. However, the relative performance of different indicators varies considerably across economies, and in some cases across sample periods. There is evidence that headline inflation tends to converge toward core inflation over time horizons of between 12 and 24 months. However, the estimated model incorporating this relationship between headline and core inflation does rather poorly in out-of-sample tests, althoughout-of-sample performance is much better for other specifications. Evaluer l'utilité des indicateurs de l'inflation sous-jacente pour la politique monétaire Ce document examine un certain nombre de mesures de l’inflation sous-jacente et tente d’identifier celles qui donnent les informations les plus utiles afin d’appréhender les mouvements à venir de l’inflation totale en vue de la politique monétaire pour les États-Unis, la zone euro, le Japon, le Royaume-Uni et le Canada. L’étude montre que ces indicateurs ajustés sont plus efficaces que le taux d’inflation total lorsqu’il s’agit de déterminer la tendance sous-jacente de l'inflation. De plus, étant considérablement moins volatiles, ces indicateurs peuvent aussi être utilisés à des intervalles plus courts afin d’apporter les informations les plus récentes. La plupart de ces indicateurs contiennent aussi des informations pertinentes pour prévoir les taux d’inflation futurs, et qui sont complémentaires à celles contenues dans le taux d’inflation total. Cependant, la performance relative des différents indicateurs varie énormément d’une économie à l’autre, et dans certains cas d’une période à l’autre. On observe que l’inflation totale tend à converger vers l’inflation sous-jacente à un horizon de 12 à 24 mois. Toutefois, le modèle estimé incorporant cette relation entre inflation totale et inflation sous-jacente se révèle plutôt médiocre dans des essais hors échantillon, bien que les résultats hors échantillon soient bien meilleurs dans des autres spécifications.

Suggested Citation

  • Pietro Catte & Torsten Sløk, 2005. "Assessing the value of indicators of underlying inflation for monetary policy," OECD Economics Department Working Papers 461, OECD Publishing.
  • Handle: RePEc:oec:ecoaaa:461-en
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    File URL: http://dx.doi.org/10.1787/741358712031
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    Citations

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    Cited by:

    1. da Silva Filho, Tito Nícias Teixeira & Figueiredo, Francisco Marcos Rodrigues, 2011. "Has Core Inflation Been Doing a Good Job in Brazil?," Revista Brasileira de Economia - RBE, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 65(2), June.
    2. Alan K. Detmeister, 2011. "The usefulness of core PCE inflation measures," Finance and Economics Discussion Series 2011-56, Board of Governors of the Federal Reserve System (U.S.).
    3. Franz Ruch & Dirk Bester, 2013. "Towards a Measure of Core Inflation using Singular Spectrum Analysis," South African Journal of Economics, Economic Society of South Africa, vol. 81(3), pages 307-329, September.
    4. Oguz Atuk & Mustafa Utku Ozmen, 2009. "Design and Evaluation of Core Inflation Measures for Turkey," Working Papers 0903, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    5. Christian Bordes & Samuel Maveyraud, 2008. "The Friedman's and Mishkin's Hypotheses (Re)Considered," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00308571, HAL.
    6. Diego Moccero & Shingo Watanabe & Boris Cournède, 2011. "What Drives Inflation in the Major OECD Economies?," OECD Economics Department Working Papers 854, OECD Publishing.

    More about this item

    Keywords

    core inflation; inflation; inflation; inflation sous-jacente; monetary policy; politique monétaire;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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