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The Performance of Trimmed Mean Measures of Underlying Inflation

Author

Listed:
  • Andrea Brischetto

    (Reserve Bank of Australia)

  • Anthony Richards

    (Reserve Bank of Australia)

Abstract

This paper uses data for Australia, the United States, Japan and the euro area to examine the relative performance of the headline CPI, exclusion-based ‘cores’, and trimmed means as measures of underlying inflation. Overall, we find that trimmed means tend to outperform headline and exclusion measures on a range of different criteria, indicating that they can be thought of as having better signal-to-noise ratios. We also find that there is a wide range of trims that perform well. One innovation for the United States is to break up the large implicit rent component in the US CPI into four regional components, which improves the performance of trimmed means, especially large trims such as the weighted median. The results lend support to the use of trimmed means as useful measures of underlying inflation at the current juncture where the growth of China and other emerging markets is having two offsetting effects on global inflation. Whereas some central banks have tended to focus on headline inflation and others have focused more on exclusion measures, our results provide some justification for a middle path, namely using trimmed mean measures which deal with outliers at both ends of the distribution of price changes in a symmetric manner.

Suggested Citation

  • Andrea Brischetto & Anthony Richards, 2006. "The Performance of Trimmed Mean Measures of Underlying Inflation," RBA Research Discussion Papers rdp2006-10, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp2006-10
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    File URL: http://www.rba.gov.au/publications/rdp/2006/pdf/rdp2006-10.pdf
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    References listed on IDEAS

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    1. Shiratsuka, Shigenori, 1997. "Inflation Measures for Monetary Policy: Measuring the Underlying Inflation Trend and Its Implication for Monetary Policy Implementation," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 15(2), pages 1-26, December.
    2. Cogley, Timothy, 2002. "A Simple Adaptive Measure of Core Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 94-113, February.
    3. Joanne Cutler, 2001. "Core Inflation in the UK," Discussion Papers 03, Monetary Policy Committee Unit, Bank of England.
    4. Michael F. Bryan & Stephen G. Cecchetti, 1994. "Measuring Core Inflation," NBER Chapters,in: Monetary Policy, pages 195-219 National Bureau of Economic Research, Inc.
    5. Cristadoro, Riccardo & Forni, Mario & Reichlin, Lucrezia & Veronese, Giovanni, 2005. "A Core Inflation Indicator for the Euro Area," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(3), pages 539-560, June.
    6. Jonathan Kearns, 1998. "The Distribution and Measurement of Inflation," RBA Research Discussion Papers rdp9810, Reserve Bank of Australia.
    7. Ivan Roberts, 2005. "Underlying Inflation: Concepts, Measurement and Performance," RBA Research Discussion Papers rdp2005-05, Reserve Bank of Australia.
    8. James Dolmas, 2005. "Trimmed mean PCE inflation," Working Papers 0506, Federal Reserve Bank of Dallas.
    9. Smith, Julie K, 2004. "Weighted Median Inflation: Is This Core Inflation?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 253-263, April.
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    Citations

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    Cited by:

    1. Verbrugge, Randal & Higgins, Amy, 2015. "Tracking Trend Inflation: Nonseasonally Adjusted Variants of the Median and Trimmed-Mean CPI," Working Paper 1527, Federal Reserve Bank of Cleveland.
    2. Brent Meyer & Guhan Venkatu, 2012. "Trimmed-mean inflation statistics: just hit the one in the middle," Working Paper 1217, Federal Reserve Bank of Cleveland, revised 01 Feb 2014.
    3. Meyer, Brent & Zaman, Saeed, 2016. "The Usefulness of the Median CPI in Bayesian VARs Used for Macroeconomic Forecasting and Policy," FRB Atlanta Working Paper 2016-13, Federal Reserve Bank of Atlanta.
    4. Mark A. Wynne, 2008. "Core inflation: a review of some conceptual issues," Review, Federal Reserve Bank of St. Louis, issue May, pages 205-228.
    5. Liam J. A. Lenten, 2010. "Bananas and petrol: further evidence on the forecasting accuracy of the ABS 'headline' and 'underlying' rates of inflation," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 29(6), pages 556-572.
    6. Ida Wolden Bache & James Mitchell & Francesco Ravazzolo & Shaun P. Vahey, 2009. "Macro modelling with many models," Working Paper 2009/15, Norges Bank.

    More about this item

    Keywords

    underlying inflation; core inflation; trimmed means; Australia; United States; Japan; euro area;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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