The Performance of Trimmed Mean Measures of Underlying Inflation
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.
|Date of creation:||Dec 2006|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.rba.gov.au/
More information through EDIRC
|Order Information:||Web: http://www.rba.gov.au/forms/rdp-order-form/|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Michael F. Bryan & Stephen G. Cecchetti, 1993.
"Measuring Core Inflation,"
NBER Working Papers
4303, National Bureau of Economic Research, Inc.
- Timothy Cogley, 1998.
"A simple adaptive measure of core inflation,"
Working Papers in Applied Economic Theory
98-06, Federal Reserve Bank of San Francisco.
- Jonathan Kearns, 1998. "The Distribution and Measurement of Inflation," RBA Research Discussion Papers rdp9810, Reserve Bank of Australia.
- Jim Dolmas, 2005. "Trimmed mean PCE inflation," Working Papers 0506, Federal Reserve Bank of Dallas.
- Joanne Cutler, 2001. "Core Inflation in the UK," Discussion Papers 03, Monetary Policy Committee Unit, Bank of England.
- Smith, Julie K, 2004. "Weighted Median Inflation: Is This Core Inflation?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 253-63, April.
- Riccardo Cristadoro & Mario Forni & Lucrezia Reichlin & Giovanni Veronese, 2005.
"A core inflation indicator for the Euro area,"
ULB Institutional Repository
2013/10131, ULB -- Universite Libre de Bruxelles.
- 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.
- Ivan Roberts, 2005. "Underlying Inflation: Concepts, Measurement and Performance," RBA Research Discussion Papers rdp2005-05, Reserve Bank of Australia.
When requesting a correction, please mention this item's handle: RePEc:rba:rbardp:rdp2006-10. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Paula Drew)
If references are entirely missing, you can add them using this form.